Credit Quicksand
Traps Consumers
Card issuers using deceptive tactics,
News probe finds

By RUSS BAKER
Special to The News

verybody wanted Rhonda Benitez. When Benitez and her husband, Mario, bought a house in South Plainfield, N.J., in 1995, they found themselves besieged by eager suitors — with names like Capital One, Citibank and Discover.

They all wanted to help the Benitezes on their way to the American Dream. "You're preapproved!" the invitations said. With interest rates as low as 0%, no annual fees and credit lines "up to $100,000," such offers were hard to refuse.

So the Benitezes signed on and began buying kitchen cabinets, a dishwasher, refrigerator, microwave oven, stove, throw rugs, paint — everything they needed for their new house.

Soon, one card became two ... then five ... then nine. Before long, the Benitezes were paying late fees of $20 to $30 per card per month. One day, Rhonda looked at the little interest-rate box at the bottom of one statement and was shocked to see that her low interest rate had skyrocketed.

The cost of her credit cards had inexplicably doubled, tripled — even quadrupled. She and her husband found themselves with nine cards at rates varying from 18% to 21.99%.

The amount they owed, including accrued interest, was now more than $30,000 — a monthly outlay of $1,200 on top of their mortgage.

	Incredible tactics are used to lure consumers.

Then the collection people began calling.

"They got really nasty," Rhonda Benitez said. "They treat you like criminals."

Today, the Benitezes are struggling to restructure and repay the mountain of debt created with credit cards they never sought in the first place.

Diane Fox, a freelance apparel industry buyer from Manhattan, said that when she explained to Capital One that she'd gotten behind on her payments because of recent surgery, Capital One officials told her that wasn't their problem.

When she discussed a payment problem with American Express, the customer service representative suggested she borrow money to pay her bill.

She and the Benitezes are not alone in their complaints. A two-month Sunday News investigation has unearthed a dramatic increase in misleading and deceptive practices routinely used by banks and credit card issuers.

Consumers are furious. They complain that banks seduce them with offers that are too good to be true and fail to disclose how easy it is to go heavily into debt. Even the slightest deviations from the fine-print terms governing late fees or exceeding credit limits will trap consumers in a spiral of increasing fees and interest.

"It's like the Wild West out there," said Gary Klein, a consumer credit specialist with the Boston-based nonprofit National Consumer Law Center, which publishes "Surviving Debt: A Guide for Consumers."

Last year, credit card users poured $18.9 billion in all sorts of fees into bank coffers — about the same amount it would take to build the Second Ave. subway.

And that figure was nearly double the figure of two years earlier. About one-third of those fees were late-payment penalties.

The average late-payment fee has risen almost 75% since 1995, according to a survey by Consumer Action, a San Francisco-based watchdog group. Bank of America, for example, increased its late fee to $29 this year from $7 four years ago.

"There's been no end to the bag of tricks," said Robert McKinley, chief executive officer of a consumer Web site, cardweb.com, in Frederick, Md., which provides data to consumers, as well as to the industry.

"You'd think (the banks) would run out by now. But regulations on credit cards are very thin. Their ability to change the terms means these are probably the only loans where the borrower doesn't know the terms. There are lots of surprises."

Complaints Grow

New York officials, consumer advocates and credit card industry observers have seen a steady growth in complaints in the past year. Chicago-based Bank One, which issues First USA cards, alone has received 2,800 complaints since the first of the year.

"Easily the most frequent complaint I hear from average people is about their credit cards," said Sen. Chuck Schumer (D-N.Y.). "Credit card solicitations are as deceptive as sweepstakes entries. Interest rates are impossible to figure out, the phone rings every night with someone trying to sell a new piece of plastic.

"People are sick of credit card industry tricks and want something done about it."

Schumer and other New York-area legislators have proposed several bills now before Congress to reform the industry. They also are trying to attach riders to a major Senate bankruptcy bill expected to reach the floor this week that would make it more difficult to declare insolvency brought on by credit card debt.

The aim is to force fuller disclosure of credit terms and curb some of the most objectionable practices.

Meanwhile, bank credit card profit margins, which grew steadily for many years before declining during the past decade as a result of competition, are again on the rise.

"This is by far the best credit card market for consumers ever," said Janet Eissenstat, spokeswoman for the American Bankers Association. "They have more choice and more access to credit than ever in the history of the credit card.

"Certainly with choice comes a need for financial literacy and the patience it takes to sort through all the choices. Ultimately, we think it's better for consumers to have those options than to be in a situation where they don't have access to credit."

A strong economy has only whetted the appetite of the bullish credit card industry. Overall, credit card solicitations increased a whopping 289% to 3.5 billion in 1998 from 900 million in 1992, according to a report by the Consumer Federation of America.

In one well-publicized incident, First USA sent a credit card solicitation to a 3-year-old — even after the child's mother jokingly wrote back, "Thanks for the great offer, but I'm only three."

Such embarrassing errors reflect a fundamental change in the $1.2 trillion credit card market, which encompasses no fewer than 6,300 companies.

A decade ago, most consumers had one or two credit cards, usually issued by their hometown banks. In recent years the credit card business has become a vast profit center for banks.

Many of the biggest players today were not even in existence a decade ago. And some of the most criticized companies are not even traditional, full-service banks; they're specialized firms that just issue credit cards.

The term "credit card" itself can be confusing. Some brands, such as American Express' famous green card, really are charge cards, requiring that you pay the balance each month. Others may have the Visa or MasterCard logo but are really debit cards — each purchase is deducted directly from your checking account.

The true credit card, however, is one with which a vendor allows you to make purchases and pay them off over a period of time.

Credit companies have become increasingly crafty in their efforts to get people to open their mailings.  Capital One sends out envelopes that say "Credit Acceptance Form 1930" in a typeface that resembles Internal Revenue Service notices. The bank's name does not appear anywhere on the envelope and shows up only in extremely small type in a special disclosure paragraph on the back of the letter.

Most credit card issuers rely on the letter of the law rather than its intent in disclosing crucial consumer information, such as rates and fees.

Capital One, for example, recently launched a marketing campaign for Amtrak's Smartrak Visa card in which the mailing merely states that, "There are costs associated with this card. Please call for details."

In other instances, consumers simply are blindsided by unannounced fees. John Rayzer, a Con Ed materials analyst who lives in Jersey City, said he was told by a card issuer that he was approved for cards, then was hit with fees he wasn't expecting, including a $69 fee to check his credit.

"If I'm already pre-approved, why are they checking my credit?" he asked.

Like information on rates and fees, most announcements of serious changes in a customer's status — including dramatic interest rate increases — are made in tiny type on inserts slipped into billing envelopes.

"It's like an Easter egg hunt," McKinley said. "You've got to go in and try to find the changes."

Adding to the confusion, major banks offer a variety of cards to appeal to a maximum number of customers.

Citibank, for example, offers the AT&T Universal card as well as its standard Citibank card. Bank One offers Bank One and First USA cards. Household Bank, part of Illinois-based Household International, issues the GM MasterCard, the AFL-CIO Union Privilege card and Household Bank card.

The marketing of credit cards has gotten so aggressive, banks are partnering with thousands of other businesses that provide access to their customers. Chase Manhattan, for example, is preparing to team up with Wal-Mart and Toys "R" Us to solicit customers in stores.

Premium Card Tango

Introductory offers, which once were in effect for as long as a year, have been whittled down by many banks to six months, and the rock-bottom teaser rates (from zero to 3.9%) may expire after as little as two months.

Many consumers are unaware that initial rates may apply only to certain expenditures, leaving the bank free to slap a high interest rate on everything else. Citibank's Platinum Select card, for example, has an introductory rate of 3.9%. But that rate applies only to balance transfers. Purchases are charged at 15.65%.

Many credit card users find themselves victims of what seems like a legal bait-and-switch scheme. Credit card companies are allowed by law to offer premium cards with special benefits and lower rates, while reserving the right, after a credit review, to substitute a less desirable card with a higher rate.

"They bait you with a card that you would otherwise not apply for, except for the special benefits it provides to you, and then they switch it with the inferior card," said Rep. Robert Menendez (D-N.J.), who is introducing legislation designed to curb this practice.

For consumers struggling to pay overdue credit card bills, there is yet another set of obstacles. One is a redefinition of the concept of lateness. Leniency, common in many other industries, has virtually evaporated for credit cards.

"Five years ago, most issuers would let you slide 15 days — if not 30 days — before they'd hit you with a fee," said McKinley, who has tracked the card industry since 1986. "Now it's a hair-trigger" response.

Many banks regard anything "received" after early morning on the due date as late. First USA was using an 8 a.m. cutoff, but reverted to 10 a.m. after a flurry of complaints; Capital One remains at 9 a.m.

Manhattan resident Lilien Black ran up against a 10 a.m. cutoff with her bank. "It was ridiculous," she said.

After twice being hit with late fees caused by the policy, Black, who does budgeting for a nonprofit agency, canceled her credit card.

While under pressure from a criminal investigation into alleged credit abuses, Providian Financial Corp. — whose net income in the second quarter this year doubled to $126 million from the same period in 1998 — moved quickly to refund $20 million voluntarily to cardholders in July.

Officials of San Francisco-based Providian blamed the problem — 700,000 unjustified late fees — on a computer glitch. The probe, conducted by the San Francisco district attorney's office, continues.

Howard Strong, a lawyer for consumers and author of "What Every Credit Card Holder Needs to Know: How to Protect Yourself and YourMoney" (Henry Holt/Owl, 1999) said he is so skeptical of the industry that he sends his payments via priority mail and tracks their arrival over the Internet.

He found that about 20% of the time, companies post payments one or two days after they arrive. Frances West, president of the Better Business Bureau of Delaware, where many of the card issuers are located, said her office gets loads of complaints.

"If you mail your payment on the 10th and it's due on the 11th, they may not credit it until the 20th," she said.

Bankers privately concede that cheating on "late" fees is prevalent, credit industry critics say.

"They all tell me, 'You know the other banks are holding checks to collect late fees. Our bank doesn't do that, but the other banks are doing it,'" Strong said.

Banks have come up with other creative ways to collect more income from customers. First Premier Bank, with headquarters in Sioux Falls, S.D., has come up with a "participation fee" for its Visa and MasterCard accounts. At $1 a month, it looks fairly innocuous.

"Even if you squirreled the card away in your sock drawer, it's still going to have this activity every month," McKinley said.

"And, of course, if you don't pay that dollar off, you can now be reported late because of this dollar charge that you didn't initiate."

First Premier justifies the fee by citing the very same high-risk customers it seeks to sign up as customers.

"Our real niche is people who have had problem credit or no credit at all in the past," said Miles Beacom, president of First Premier's bank card division.

Many modern credit operations are engaged in what some critics consider a form of legalized loansharking.

Even when a bank says an introductory rate will increase to a stated "fixed APR" (annual percentage rate), that, too, is misleading. The fact is, banks can raise any rate with 15 days' notice — for any number of reasons.

Lorraine Vanciomari, a cashier for New York State's Off-Track Betting Corp., and her husband, a city police officer, thought that "fixed" meant not fluctuating, but they learned otherwise.

Their Household Bank MasterCard went to 21.4% from 5.9%. Her First USA Visa card jumped to 22% from 5.9%. Her 7% Discover card skyrocketed to 22.8%.

Rate Roulette

Like the Vanciomaris, many consumers don't even realize their rates have increased.

"I see what the minimum payment is, I write out a check and I mail it," said Vanciomari, who lives in Wantagh, L.I.

So do most people. But banks can — and do — raise interest rates for any number of reasons, including a single late or missed payment.

"You're going from fixed rates of 7.9 or 8.9 automatically to 22%, and the only thing you've done wrong is missed a day late, an hour late," said Dean Sager, a staffer with the House Banking Committee.

It may even be that you missed your mortgage payment or your car payment — which has nothing to do with your credit card but everything to do with your credit rating. Banks also can raise interest rates if they think you have too many other credit cards.

In the industry, this is called "risk-based pricing."

Some issuers pull customer credit reports every six months just to see if, by a mathematical formula, a consumer's credit worthiness has deteriorated.

These risk-based interest rates vary: typical are Citibank's 23.9%, First USA's 25.46% and Capital One's 24.99%. Consumers have reported being charged from 29.9% all the way to 32.6% by the Associates First Capital, a credit card issuer based in Delaware, one of a number of states where credit card regulation is minimal. In New York, usury laws limit state-chartered banks to interest rates of 25%.

Banks say they charge irresponsible customers these punitive rates in order not to penalize their "more responsible" customers. They say they will roll back a punitive interest rate after a customer makes a specific number of consecutive on-time payments.

"We will automatically review the account to see if we can afford to bring that down," said Carter Warren, Delaware-based executive vice president for City One's First USA division.

Fleet Bank's Kathy Conaboy said Fleet will lower the rates at some point, but declined to state under what conditions. "It's a whole proprietary process that I can't discuss," she said.

Small Payment, Big Profit

As high interest rates push balances higher, banks are reducing their required minimum monthly payments. That, of course, ensures the issuer a steady stream of interest income.

"People are shocked to learn that it would take as long as 15 years to repay a credit card bill if they're making a minimum payment — and they really don't have a good credit rating while they're doing that," said Alan Franklin, president of American Credit Alliance, a credit counseling agency.

In many cases, the interest rate is so high that it virtually cancels out any principal repayment.

"The average consumer's balance is going to increase over time rather than go down," said Klein of the National Consumer Law Center.

"There are many ways that banks encourage people to run up their balances and generate bigger interest charges, but the biggest problem right now is that they encourage them to make (only) minimum payments."

This, in turn, leads many consumers to max out their credit cards — and makes them vulnerable to stiff fees for exceeding their credit limits.

The average monthly fee for being over limit these days is $29. And that's not all.

"Some banks actually authorize the charge that puts you over the credit limit and then penalize you," McKinley said.

Worse, some consumers incur over-limit fees month after month because they do not realize that the "minimum payment due" listed on their statements will not bring their cards under the limit after new interest charges are added.

"It's very easy for these things to become a game for generating fees on top of fees," Sager said.

Matters have gotten to a point where some companies penalize cardholders for not using a card or for using it too infrequently.

Still others charge fees for closing accounts. First Union, one of the companies that first instituted a closing fee, has since backed off, following consumer protests.

Glenn von Nostitz, director of research for New York City Public Advocate Mark Green, thinks these kinds of fees will become increasingly common: "You may not get this free ride anymore. If you pay off your card every month, they're not making a lot of money on you."

First Premier Bank and Household Bank tack on automatic minimum service charges that create a carryover balance if not paid off, allowing the banks to levy interest on any purchases made during the previous month — even if the cardholder has paid off the balance in full.

Banks are also aggressively promoting highly profitable offers, such as card registration services, discount shoppers clubs and even car-towing to credit card holders. McKinley said a number of the companies have used third-party solicitors that resort to "slamming," or signing up people who have already refused service — especially college-age consumers.

Credit card companies love college students, because parents will step in to bail them out if they overspend.

"But it's really playing games with people's lives," Sager said.

Cleaning Up Their Mess

Today, Rhonda and Mario Benitez are working with a nonprofit credit counseling agency, which is funded by card issuers. As a result, the 21% interest rate on their Discover card was reduced to 9%, and First USA Visa eliminated what had been a rate of 22%.

In five years, the Benitezes will be able to pay off what might otherwise have taken decades to resolve — if ever.

All of which has Rhonda Benitez pondering how the credit card issuers can afford to take rates so low.

"Why do they wait until the counseling service gets involved instead of working with their own customers?" she asked.

Are their profits based on the assumption that most customers, out of ignorance or fear, will remain on a debtor's treadmill, paying exorbitant rates, month after month, year after year?

Additional reporting by Rachel Tsutsumi

Interest rates, penalty fees and other consumer costs mentioned in this article are subject to periodic change. Consumers should contact credit issuers for further information.

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