It's a business decision ...

This morning in the mail, I received a notice from one of my credit card companies saying that my rate would be increasing about 50%, from around 12% to 19%.

After a few e-mails and phone calls to find out why my rate had changed, I just wanted to pass along some insight that everyone needs to understand about credit cards and that is this: your credit card interest rates have absolutely nothing to do with your credit scores, your payment record, your overall debt, income, or anything like that. The only thing that the credit card companies care about (and Citibank in particular, in my case) is meeting a certain revenue target and gaming your agreement with them in order to make that happen.

In a nutshell, when I called Citibank to ask them why my rate was changed when my credit score is in the mid 750's, our household debt has gone down, we've never been late on a payment to them or anyone else, the response was, "it's a business decision." Seriously, that was the answer, word for word. I was surprised by the rep's bluntness, but pressed on. "So, it has nothing to do with risk, it's all just about meeting revenue targets?" He said that yes, it had nothing to do with me, it was about hundreds of thousands of clients. I think what he meant to convey was that I shouldn't take it personally, but I very much took it that way.

When you enter into an agreement with a credit card company, understand that you are entering a contract where they are able to change their terms whenever they want but you have no similar option. If I actually had a purchase balance on this particular card, I would have the ability to "opt out" of this rate increase but would have to pay off the entire balance before my card's expiration date in 2008.

Here's the kicker, though. I do actually have a balance on this card. It's from a balance transfer I did a few years ago, and it's at 2.99% until it's paid off. The rep at Citicard assured me that this balance is not affected by the change, but on this notice, there is this paragraph at the very end:

"If we decide not to replace your card that expires in 2008, none of these changes will apply to you. You may use your account under the current terms until the expiration date on your card. At that time, we will close your account. You must then pay the balance under the current terms."

Now, call me cynical but I think that the odds that Citibank will decide not to renew my account past 2008 just went way up. I'm a losing bet for them, you see - a low interest rate, no new purchases at a higher rate, no merchant fees, and no late fees (after which they could raise my rate from 2.99% to 28.99%).

Now wait a minute, you say - people with bad credit have to pay higher rates on debt, right? Yes, that's true, and you'll definitely see this relationship when you buy a car or a house, but it's tenuous when you're talking about credit cards. All it means is that the vast range of possible rates you will pay with bad credit starts a little higher up the scale.

But even when you go buy a car or a house, your interest rate vs your credit score is just a starting point. I knew a girl with bad credit who went to buy a car and the dealer not only charged her an incredibly high 23% interest rate (which she deserved) but he also tripled the price of used car she was buying so that in effect, the "real" interest rate she paid for that car was closer to 90%. Since there are no laws about how much a dealer can charge for a car but a 90% interest rate would probably raise a few eyebrows at a finance company, they just switched around the equation to get what they wanted. Didn't do them much good since she couldn't afford payments that high - but might have been able to if they'd charged her the Blue Book value of the car and based the 23% rate on that instead - and the car was repossessed, probably to be cycled back out to some other poor purchaser.

Buyer (and borrower) beware ...