Banks continue to raise rates ahead of new credit-card law

Credit-card reform may be looming in the headlines, but for now the fine print is still hitting consumers hard.

Banks keep raising minimum payments, interest rates and fees, continuing the credit tightening that began last year, even as cardholders are falling further behind on their payments.

The rate at which banks are writing off card debt as unpaid jumped to 10.6 percent in May, up more than 65 percent in a year and the highest rate since 1989, according to Moody's Investors Service.

"Clearly, households are under duress and are having trouble paying back their credit-card balances," said William Black, a Moody's senior vice president.

They likely will continue to have a hard time as the economy struggles. Moody's expects the charge-off rate to continue climbing, peaking at about 12 percent around this time next year.

Meanwhile, Citi, Chase and Bank of America, three of the six largest card issuers, have increased the costs for using credit in the past few months.

Citi has boosted interest rates on some cards to as high as 29.99 percent, according to a Credit Suisse report. Chase raised rates as high as 23.99 percent and increased balance transfer fees to 5 percent of a transaction with a $10 minimum, up from 3 percent with a $5 minimum, the report says.

Capital One has kept rates steady for now but warned consumers they will increase over the next year.

"We expect purchase APRs to continue to trend higher ahead of the recently passed credit-card legislation, slated to go into effect February 2010," wrote Credit Suisse analyst Moshe Orenbuch.

The credit-card reform bill signed by President Barack Obama in May restricts the changes banks can make on certain fees and charges. Still, since its passage, consumers also have been hit with higher minimum-payment requirements, decreased rewards-points values, higher penalty fees for overlimit purchases and late payments, and higher fees for cash advances.

Some political leaders have criticized banks for taking advantage of the time lag before the new law kicks in. "Issuers during this crisis should be using this period to adapt to the new rules about to take effect, not raising rates and changing terms on those who are already meeting their obligations," said Rep. Carolyn B. Maloney, D-N.Y., the prime sponsor of the bill.

Consumer advocates say the increases continue a trend that began long before the legislation passed -- a year and a half ago or more, said Travis Plunkett of the Consumer Federation of America.

"To some extent, they're trying to get in under the wire," he said, adding that all of the changes can't be blamed on the new regulations. Plunkett said banks are using their credit-card customers to bring in revenue to help cover continuing losses.

Indeed, Citi alone is taking in about $500 million per quarter in new revenue from increasing interest rates, according to Richard Bove, a banking analyst with Rochdale Securities. "The company clearly needs revenues, there's no question about that," he said.

Bove said banks also may expect further restrictions on their practices from the proposed Consumer Financial Protection Agency, which some fear may bring back restrictions in interest rates, along with limiting other charges.