Are Bank of America's Credit Card Practices "Unfair and Abusive" to Consumers?
Bank of America's credit card practices have been under a lot of scrutiny lately. In April of 2007, Consumer Action released a report detailing what they call "abusive" credit card practices, and they identified several behaviors BoA engages in. And just a month before that, Bank of America was called before a Senate committee to answer to charges that it engages in practices Senator Carl Levin has called "unfair and abusive practices". What is Bank of America doing that is so upsetting to consumers, consumer advocate groups, and United States legislators?
Bank of America Charges High Penalty Fees and Hits Customers with Outrageous Interest Rate Hikes
If you're late on a payment or you go over your limit, Bank of America might charge you a whopping $39 fee, among the highest late and overlimit fees in the credit card industry . But perhaps the most egregious of the practices identified by the Senate committee is the use of penalty interest rates, known as "default rates". This practice means that if you're late on a payment you could end up with a default rate much higher than the interest rate you accepted when you got your card. For example, the Bank of America Visa Platinum Plus has an APR as low as 11.24%- but a default rate of close to 30%.
Imagine that you accept a card at the 11.24% rate, and then make a few expensive purchases or run into some health problems and end up with a balance of $8,650- which is the average amount of credit card debt held by low and moderate income American households. Then you're one day late on your payment, and Bank of America nearly triples your interest rate, to 29.99%. The new rate applies to the old balance (plus the penalty fees they're also charging you) which means you're suddenly on the hook for a $8,689 "loan" at a much higher interest rate than you initially agreed to.
Let's say you had been planning to pay off your balance in 5 years, paying about $190 a month. At the 11.24 % rate, the total cost of that $8,650 loan with five years of interest would be $11,345. That's $2695 in interest, and that's bad enough. But to pay off the new balance with the new interest rate in the same amount of time, you'd need to pay about $280 a month, and at the end of five years you'd have spent $16,865. That higher interest rate over a five year period will cost an extra $8,200- almost double the original debt.
And what if you can't afford that monthly payment of $280? At $218 per month, it will take you 20 years to pay off that card- and you'll have spent a whopping $52,000 to do it. That's right- an $8,650 medical bill could end up costing you over $40,000 in interest and take 20 years to pay off.
Your Bank of America Credit Card can Trap You in a Seemingly Inescapable Cycle of Debt
Sudden jumps in an interest rate can lead to higher minimum payments, which in turn may lead to late or missed payments and trigger a cycle of late fees, higher interest rates, and more missed payments that can leave customers mired deep in debt. At the March 7th senate hearing, credit card issuer Citigroup committed to end the practice of changing interest rates in mid-stream, waiting instead until the customer's card expires to adjust terms and conditions. But the head of BoA's credit card division refused to commit to such changes, and the company has not implemented any such changes since the hearing.