US credit card issuer Citi may reverse a pledge
it made last year to no longer reserve the right to raise interest
rates on credit cards, at any time, for any reason – a practice
known in the industry as universal default, for which Citi and
other issuers faced intense criticism from US regulators and
Citi’s pledge to abandon universal default drew
widespread praise from US politicians who were calling for greater
regulation of the credit card industry. In March 2007, Citi
announced it would no longer raise a cardholder’s interest rate if
the cardholder was late with repayments or bills, including those
unrelated to the cardholder’s account.
Citi stated that while it would no longer
reserve the right to raise rates at any time, it retained the right
to raise them every two years when cards were due for renewal. Citi
said that the new policy was effective “immediately” from March
2007 for new customers and would go into effect for current
customers by April 2007.
However, that was before the credit crunch
first reared its head in mid-2007, and Citi is counting the cost of
disastrous mortgage-linked investments which knocked a $40 billion
hole in its finances. Citi is also having to contend with the
continuing fall-out of the credit crunch, which is sapping consumer
spending and card profitability in the US. Delinquencies and
charge-off rates are rising, and a slew of credit card-related
legislation is being proposed in the US Congress and Senate by
politicians eager to crack down on what they see as naked
profiteering by card issuers.
Although it is unclear just how much profit
Citi made from the practice of universal default, the pledge to
reverse the practice undoubtedly cost Citi revenues gained from
hiking interest rates on riskier customers. And new rules proposed
by the Federal Reserve and the Office of Thrift Supervision would
further curtail issuers’ ability to raise rates for riskier
customers – whereas previously lenders could raise the interest
rate on both an existing balance as well as new debt, the proposed
rules would limit rate increases to customers late by 30 days or
more, and the new rate would apply to newly accumulated debts