Rising credit card rates and fees sting consumers

11.11.08
By Timothy Jones

In the coming months, be on the lookout for another potential consequence of the credit crunch - higher interest rates and fees imposed by your credit card provider.

An article in USA Today draws attention to a practice known as securitization, which it claims has helped contribute to the trend of raising rates and fees - a pattern which has only grown more common as Wall Street falters and banks lose money.

Securitization is the practice of bundling up card debt into securities and selling it off to investors - an action regularly practiced by many of the largest financial institutions during the past five years.

Although it can be a valuable economic tool, it can also lead to abuses, said Rep. Carolyn Maloney, who has campaigned for credit card debt reform.

That is because securitization gives banks another reason to raise fees, USA Today explains. Although the risk connected to these packaged credit card accounts is partially passed along to the investors, the banks are still the ones that benefit when rates go up.

So, it creates a win-win situation for financial institutions: they reduce their own risk while potentially collecting more money from borrowers with credit card debt. However, there is a loser in this situation: the consumer.

Travis Plunkett of the Consumer Federation of America told the news provider that changes must be made to protect cardholders.

"Securitization has increased the willingness of credit card companies to offer riskier loans," he said. "And to compensate, they have moved to a business model that involves hitting consumers with very high - often unjustifiably high - rates and fees."

However, there are other reasons that credit card companies may choose to change the terms connected to your account.

For example, if you have a card that was previously rarely used but has suddenly been utilized to make thousands of dollars of purchases, a bank may grow wary and take action by lowering your credit limit.

With credit card defaults on the rise, card providers are looking for any warning signs that a cardholder may not be able to manage their credit card debt so they can protect themselves from risk.

"In normal times, if you look at the hierarchy of what gets paid, it's credit cards that tend to be the last thing if the going gets rough," consumer advocate John Ulzheimer told CNBC.

If you notice that the interest rate on your credit card has been raised or your credit limit lowered, you can contact your provider and try to negotiate different terms.

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Credit card companies are raising fees