When credit card firms adjust the interest, limits

If credit-card companies ever seem like they're playing a cat-and-mouse game with your credit limits or interest rates, remember the perspective of the mouse - to whom it can be a very costly game.

Consider the case of Marc Crawford, of Philadelphia's Mayfair section. Crawford says he rarely used his HSBC MasterCard, which had a credit limit of $9,200. But after he splurged on $1,500 worth of Christmas gifts for a new grandbaby, he found his credit limit had been cut to $2,500 - a change that could hurt his credit score.

Or consider what happened to Roxanne Reitmeyer, of Ardmore, who has two Bank of America credit cards with interest rates under 10 percent. Last week, Bank of America notified her that the rates on each card would rise next month, essentially doubling her monthly interest costs.

Both kinds of changes are happening with rising frequency. Bank of America, for instance, acknowledged last week that it was raising rates on four million U.S. cardholders with characteristics similar to Reitmeyer's: They carry a balance, and have rates under 10 percent.

Card issuers say they're simply managing credit-card accounts more conservatively in light of the nation's economic distress, which has forced them to write off more credit-card debt and raised their costs of funds.

Bank of America spokeswoman Betty Riess says the four million cards represent fewer than 10 percent of the bank's U.S. cardholders. She says the bank is raising prices on cardholders whose cards are "underpriced relative to current market conditions."

Consumer advocates have a more skeptical view of lenders' recent changes. They believe financially stressed banks are trying to squeeze more profits from a relatively healthy segment of their businesses.

A case in point: Until it backed down last month under pressure from the New York Attorney General's Office, JPMorgan Chase & Co. had sought to impose a brand-new $10 monthly service fee on more than 300,000 cardholders. Chase agreed to refund $4.4 million.

For consumers facing any change in credit limits or terms, the most important thing is to understand what's happening and the choices you have in response. If you're already feeling financial stress, any changes in terms can make a bad situation worse.

Crawford had few options beyond the one he took: complaining to HSBC and to its federal regulator, the Comptroller of the Currency.

It's not clear what the comptroller can do. Credit cards are are open-ended extensions of credit, and banks say they need to respond swiftly to signs of increased risk. No advance notice is required.

Still, Crawford's complaints got some traction. Last month, HSBC bumped his limit up to $5,000.

Crawford was right to be concerned about his credit score, says Linda Sherry of the California group Consumer Action. She says the key worry is a "domino effect": Lower credit scores can prompt lenders to raise cardholders' interest rates, which in turn can boost balances and expose consumers to over-limit fees and penalty interest rates.

Sherry believes lenders should at least be required to notify cardholders of reductions in credit limits - as new federal rules will require next year in some circumstances. Crawford discovered his limit had changed when he went online to pay his February bill.

"It's a key term - along with interest rates, it's the term that matters most to people," Sherry says.

If they can't afford higher interest payments, Bank of America cardholders such as Reitmeyer face similar risks, but have another option: They can formally decline the change in terms - if they're willing and able to close their accounts.

That doesn't mean they must immediately pay off their balances. They simply have to continue to meet the terms of the old agreement and make timely payments.

But it does mean that they can't use their cards, because making additional charges constitutes "acceptance" of the new rates.

That seems fair enough. If you have an account you're closing to reject changed terms, the best thing to do is cut up the card, or tuck it in a drawer.

But there's a trap that snares many consumers: unintentional charges, such as recurring fees for online services or magazine subscriptions. If you use your card for such payments, make sure you provide another card or request a different payment method. Accidental or not, credit-card banks will treat any subsequent use as an excuse to reactivate the account at the higher rates - another trap that will disappear when new rules take effect in July 2010.

At that point, or perhaps sooner if Congress intervenes, cardholders won't face such stark choices. For instance, lenders won't be able to change rates on existing balances if cardholders are current with payments.

But for now, stressed consumers are being buffeted by unfriendly market conditions - including less opportunity to take the time-honored step of taking their business elsewhere.

Consumers can shop online for credit cards at sites such as www.LowCards.com. But those who rely on solicitations from card issuers, which topped 5 billion in 2007, are likely seeing fewer offers.

According to Mintel Comperemedia, U.S. consumers received 148.8 million solicitations in February - down two-thirds from the '07 pace.