Charges Are Flying Over Card Pitches

Hoping to grow in an increasingly saturated market, credit card banks are offering some of the best deals ever: How about 0% interest for six months? A permanent rate as low as a mortgage? Cash back for every dollar charged?

But even as the offers get sweeter, the credit card industry is under attack for failing to live up to its promises. A growing backlash from cardholders, consumer attorneys and government regulators is raising questions about whether credit card marketing tactics have gone from aggressive and creative to deceptive, misleading or even unlawful.

* The San Francisco district attorney is investigating a flood of complaints against Providian Financial Corp. for allegedly deceptive marketing practices, and a civil lawsuit accuses the company of false advertising.

* Large credit card banks such as Citibank, Chevy Chase and First USA face an unprecedented wave of class-action lawsuits filed by customers over sudden interest rate hikes or cancellation of rebate programs.

* President Clinton last month proposed tighter disclosure rules for companies that try to entice customers with so-called teaser interest rates that expire in a few months. And in a June 7 speech to bankers, the nation’s top banking regulator, Comptroller of the Currency John D. Hawke Jr., warned the industry to clean up its act or risk government intervention.

“These are all bad signs for the industry,” said Chuck Paustian, editor of Card Marketing, an industry trade publication. “You never want to see regulators coming in.”

At the center of the credit card controversy is the approximately 3.4 billion solicitations that clogged U.S. mailboxes last year, according to BAIGlobal, a research firm. That’s nearly four times the volume of credit card junk mail sent in 1992.

At the same time, consumers are only half as likely to bite at a given offer. The response rate to credit card offers slipped to 1.2% of total offers last year, from 2.8% in 1992, according to BAIGlobal. Increased competition and lower response rates mean banks are more eager than ever to catch the attention of consumers, using attractive terms and offers.

Industry officials deny any attempt to mislead consumers.

“We make certain that all our offers are compliant with the laws and regulations,” said Marc Loewenthal, a Providian spokesman.

At the same time, Providian is responding to concerns raised in the criminal investigation and the lawsuit by offering automatic refunds to customers who claim telemarketers forced them to buy credit insurance or other add-on products. The company also is reviewing marketing materials to “ensure they are clear from a customer’s perspective.”

Atlanta credit card consultant Bruce Brittain said complaints might be avoided if consumers simply read the fine print of marketing pitches and cardholder agreements more carefully.

“There are few issuers who fail to disclose the terms,” he said.

Consumer attorneys say the issues go beyond reading fine print. They accuse credit card companies of breaking explicit, written promises; imposing new costs or requirements; or taking away some of the very benefits that led consumers to apply for a card in the first place.

Citibank, for example, is being sued for abruptly canceling a co-branded credit card with Ford Motor Co. that allowed holders to earn points toward rebates on car purchases. First USA and Advanta Corp. have settled lawsuits accusing them of terminating introductory interest rates before they said they would.

In March, Chevy Chase Bank was sued by Trial Lawyers for Public Justice, a Washington-based consumer group that contends the company reneged on a written promise to never charge its cardholders more than 24% interest. By relocating its headquarters from Maryland, where state law caps credit card interest at 24%, to Virginia, which has no such limit, Chevy Chase was able to hike the interest it charges on as many as 1 million cardholders, the consumer group contends.

An attorney for Chevy Chase, which sold its credit card business to First USA last year, said in a statement that the bank does not believe it broke any state or federal laws.

Some consumers are outraged when their card issuer changes terms.

“It smacks of bait and switch to me,” said Carter Carrigan, a Redondo Beach pet sitter who has spent several months and dozens of phone calls trying to straighten out a dispute with First USA.

A year ago, Carrigan responded to a First USA offer for a card with a permanent 9.99% interest rate. But in April, Carrigan noticed that the rate had jumped to 19.99%. First USA blamed the rate hike on a late payment; Carrigan said he mailed his payment eight days early.

Tired of fighting the company, Carrigan moved his balance to another card. Shortly thereafter, the company agreed to lower his rate.

First USA officials said they could not comment on specific customer accounts. The company is battling similar charges in Texas, where cardholders have filed federal lawsuits alleging that the company failed to promptly process payments so it could charge late fees.

Federal law requires that banks give customers 15 days’ written notice of planned changes in credit card terms. A handful of states also require that cardholders be permitted to close their accounts and pay off the balance under the old terms.

At the heart of the defense of First USA and most credit card companies is a simple phrase: “We reserve the right to change the terms of our agreement.”

Most banks claim those words--which are included in virtually every cardholder agreement--enable them to legally raise fees, increase interest rates or take away benefits.

“That language has been in our cardholder agreements for years,” First USA spokesman David Webster said, noting that sometimes issuers use the clause to lower rates or enhance benefits. “A rate change is not done lightly. But it’s a competitive market. If customers don’t like the change, they can always look elsewhere.”

But consumer attorneys say credit card issuers can’t use the clause in cardholder agreements to legally justify any action they take.

“If they say it’s a permanent interest rate, they can’t go back and change it,” said Robert Green, partner at San Francisco-based Girard & Green, which is representing cardholders in the Providian suit, which was filed in San Francisco County Superior Court. “You can’t solicit business by making promises and then make that promise worthless with some term in the fine print.”

In California, state courts have rejected the assertion that credit card companies have unlimited powers in altering their contracts.

In a case involving Bank of America’s attempt to insert arbitration clauses in existing cardholder agreements, a state appellate court last fall ruled that banks do not have carte blanche in changing contract terms. The state Supreme Court upheld the ruling in February.

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Marketing to Mailboxes

Credit card companies are flooding mailboxes with a record number of offers, but consumers aren’t biting as much as they once did. Below is the annual number of credit card offers sent to U.S. consumers, and the percentage of recipients responding to the solicitations.

Mail Volume

‘98: 3.4 billion

*

Response Rate

‘98: 1.2%

Source: BAIGlobal Inc.