SAN FRANCISCO -- While millions of borrowers are basking in low interest rates, refinancing their mortgages and buying new cars, other consumers are watching their credit card rates climb further into the stratosphere - to 30 percent and beyond.
Providian Financial Corp. recently raised the rate on its high-risk accounts from 23.9 percent to 29.9 percent, a move that threatens to drain thousands of dollars from financially strapped households during the next few years.
The strategy is part of the credit card industry's attempt to boost profits in a sagging economy. Lenders believe they can offset some losses by collecting more from borrowers who have been flagged as the most likely to miss payments.
The new rate at Providian, which is nursing an ailing loan portfolio, affects about $5 billion in outstanding loans nationwide. The San Francisco-based company said the 29.9 percent rate will apply to 3.3 million of the 18.5 million accountholders on its books as of Sept. 30.
"There are two ways of looking at this practice," said Robert McKinley, president of CardWeb.com, a Frederick, Md., research firm that tracks industry trends. "Lenders are either getting compensated for the risks they are taking or they are beating up on disadvantaged consumers in an effort to make more money."
Some of the consumers grappling with higher credit card rates are college students who got carried away with their first credit cards. Some are immigrants who haven't established credit records to qualify for the best rates. Others are trying to re-establish good credit after a past bankruptcy, or people who stopped paying bills after losing jobs in the recession.
Providian's higher rates have infuriated many customers, but the lender believes the risks posed by the affected customers justifies the move, said Konrad Alt, Providian's chief public policy officer.
"If people don't like it, they can try to find a better deal someplace else," Alt said. "People always have the option of paying off their balance and closing their accounts."
Providian isn't the only lender imposing hefty finance charges at a time when many short-term interest rates are falling to their lowest levels in decades.
Atlanta-based CompuCredit Corp. charges 35 percent for an Aspire credit card issued to its high-risk customers. The 35 percent rate applies to about 12 percent of CompuCredit's loan portfolio, which stood at $1.8 billion as of Sept. 30, said Nancy King, director of investor relations.
Despite such increases, the average credit card interest rate nationwide stood at 14.41 percent in November, down from 16.57 percent at the start of 2001, according to CardWeb. That drop reflects the overall decline in interest rates, and credit card companies' efforts to increase business from their best customers by offering rates in the very low single digits.
After CompuCredit and Providian, CardWeb.com identified the next highest Visa and Mastercard rates as: 23.9 percent from Direct Merchants Bank; 22.9 percent from NextCard; and 22.9 percent from Sears. Other lenders might charge similar or even higher rates for certain high-risk customers.
"It's really getting crazy out there. It's almost starting to border on loan sharking," said Jack Jones, a specialist for Consumer Credit Counseling Service of San Francisco, which advises overextended borrowers.
Hilda Madera of New York says the 23.9 percent rate on her American Express Blue card makes reducing her $2,000 balance almost impossible. "I try to pay a little more than the minimum every month, but it just doesn't seem to budge. I can't seem to make a dent in it," she said.
A single mother who supports herself and two children on her $58,000 salary as a computer specialist, Madera believes credit card lenders have been taking advantage of her for years. She carries about $23,000 in debt on six different cards, most with rates of 20 percent or more.
"You never really notice the rates until you start having trouble paying them off and then, it's like, 'Oh my gosh, I can't believe this,' " she said. Madera has written several lenders seeking a reduced interest rate, so far without luck.
American Express imposes its 23.9 percent rate on customers who have missed payments or violated their credit card contract in some other way, spokeswoman Judy Tenzer said. Although he usually makes her payments on time, Madera says she has fallen behind in some months.
Many other lenders raise their rates above 20 percent when customers become delinquent. In some cases, lenders even impose higher rates on customers in good standing when they learn of a missed payment to another bank.
American Express generally will consider lowering the 23.9 percent rate after 12 consecutive months of good credit behavior, Tenzer said. "It really is a way of letting people there are certain expectations that come with having a credit card with us, and one of those expectations is that we will be paid," Tenzer said.
Credit card lenders say the higher rates don't hurt consumers as much as it might seem. They also say the rates discourage people from running up even higher balances and getting into deeper trouble.
Based on the typical $1,000 balance carried by Providian customers with the new 29.9 percent rate, a cardholder will pay about $60 more in finance charges this year, estimated Alt of Providian. "We don't think forcing people to pay $5 more a month is going to drive anyone into bankruptcy," he said.
The higher interest rate won't change minimum payments, which typically range between 2 percent and 3 percent of the outstanding balance, no matter what the interest rate might be.
But it makes a huge difference for people who take a long time to pay off their balances.
A customer making minimum payments of 3 percent on a $1,500 balance with a 23.9 percent rate would need 17 years to repay the debt and incur a total of $2,524 in finance charges. The same balance with a 29.9 percent would take more than 30 years to repay and incur a total of $6,107 in finance charges, assuming only minimum monthly payments are made.
Under the same repayment scenario, a cardholder with a $1,500 balance and a 7.9 percent rate would wipe out the debt in 8 1/2 years at a cost of $372 in finance charges.
High rates are driving away some customers like Floyd, a truck driver who owes $6,800 on two Providian accounts at 23.9 percent interest.
Floyd, who asked his last name be withheld to spare him embarrassment, was becoming fed up even before Providian raised its top rate to 29.9 percent. After spending three months unemployed, he has been making good money the last two months, and is looking for another loan to pay off the Providian accounts.
"When they give you the cards, you figure the rates will eventually go down, but Providian refused to budge. It makes it all seem like a scam," he said.
Unlike Floyd, many consumers getting hit with the higher rates can't qualify for a lower rate loan from another bank, either because they are unemployed or have poor credit records.
"The lenders know they are going after a captive audience with these higher rates," said Howard Dvorkin, president of Consolidated Credit Counseling Services in Fort Lauderdale, Fla. "That's putting a lot of these people behind the eight ball."
On the Net:
Tips from Consolidated Credit Counseling Services: http://www.debtfree.org
Credit Card Interest Calculator: http://www.truthaboutcredit.org