One Debt Begets Another

More consumers are behind on payments.

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Danielle Mathias-Lamb, a second-year nursing student, received a letter from Bank of America in January with a shocking message: The credit card she used to pay for her tuition was going to jump to a 28 percent interest rate from 10 percent.

She didn’t make any late payments but she just carrying higher levels of debt than she would have in a perfect universe. She was close to maxing out her credit limit with the $7,000 balance she kept on it. (The card originally came with zero percent introductory rate, one reason she decided to use it to finance her education.)

Consumers like Mathias-Lamb are increasingly finding theme selves forced to deal with higher interest rates and other fees as credit card companies respond to the fact that consumer debt is climbing, along with delinquency rates. In January, average debt on credit accounts such as auto loans climbed to $16,600, up from $15,500 last April, according to the credit reporting agency Experian. Over the same period, the average number of accounts per individual that are overdue by one payment or more climbed to 1.01 from 0.97. Bank of America says it may raise rates when costumers’ risk profiles worsen or when they are late or exceed their credit limit twice in a 12-month period.

Risk. In an earnings call in late January, Bank of America executives said credit card delinquencies in California, Florida, Arizona, and Nevada — states with high foreclosure rates — increased five times as fast as in other states, suggesting that consumers struggling with their mortgage debt are also finding their credit card bills hard to pay. ‘We’re focused on getting paid for the risk we take,” said Joe Price, chief financial officer.

Ben Woolsey, director of marketing and consumer research for creditcards.com, says, “It’s clear that card issuers have tightened their credit… They’re also trying to chase off their bad customers or chase a lot more profit from those people.”

Meanwhile, many customers with strong credit are enjoying the windfall from Federal Reserve Board interest rate cuts. According to indexcreditcards.com, the average rate for non-reward credit cards feel to a two-year low of 13.66 percent in mid-February.

Indeed, Bank of America’s Betty Riess says rate hikes are affecting only a small percentage of customers. She adds that customers are always notified in advance, as required by law, and that they have the option to reject the terms and pay off the balance at the original rate. Of course, as consumers with high-risk credit profiles, they have no guarantee of finding a better deal elsewhere.