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Spencer for Hire :: Credit Card Rates Can Be Increased If Your Credit Score Dips

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A man discovered that his interest rate on his MasterCard jumped from 6.2% to 16.99%, nearly tripling. He asked the credit card issuer why, noting that he had always paid the account on time and he kept within his credit limits.

The issuer, a well-known banking company, replied that his creditworthiness had somehow changed and that it reserved the right to raise his rate accordingly. It turns out the culprit was the mortgage on a new house that he purchased.

A provision now built in to most credit card agreements allows the companies to reset anyone’s interest rate based on the size and status of other debts and to a lesser degree a significant drop in their credit scores.

Improvements in information technology and a change in Federal Law have led credit card companies to check their customers’ data regularly not only when they review applications or notice missed payments.

Concerned that consumers have not been adequately informed about the practice and that the sharp jumps in rates may be unreasonable, some federal and state legislators are proposing limits.

“Such practices increase the cycle of indebtedness, poison customer relationships and spur bankruptcies that hurt borrowers and creditors”.

Card companies say they are taking prudent action to increase the rates of cardholders who show signs of financial strain. They still look mainly at the customers’ payment records with them, they say, but add that the sophistication of today’s credit reports-credit scores and data from several lenders allows them to change rates based on other factors.

So if someone misses payments on an American Express card, the interest rate on his or her Citibank card may jump. To a lesser extent, taking out a car loan or mortgage, or applying for other credit cards, can set off a rate increase because a new loan can lower one’s credit score and stretch a borrower’s ability to repay a debt.

Three out of four credit card companies now use credit reports to reconsider cardholders’ revolving interest rates, industry experts said. Those that do include some of the biggest card issuers, like J.P. Morgan, Chase, American Express, MBNA and Capital One.

While each credit card issuer decides which factors warrant a rate change, virtually all companies keep tabs on a cardholder’s credit score, the single number calculated to represent the information in a credit report.

The score ranges from 300 to 850, with higher numbers designating more creditworthiness.

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