Bank of America has been under fire recently for its decision to begin applying penalty interest rates as high as 29.9% to delinquent credit card accounts beginning June 25, 2011. While the company is well within its legal rights in making the change, that hasn’t stopped the court of public opinion from quickly declaring the financial giant guilty.
Penalty terms will only affect any transactions made more than 14 days after consumers are notified of the change, according to Bank of America. In other words, Bank of America’s announcement does not affect the interest rate on any balance that a consumer already has at the time of notification. According to the Credit CARD Act of 2009, credit card companies are prohibited from increasing interest rates on existing balances unless an account is 60 or more days delinquent.
Penalty APRs won’t automatically be applied to accounts after a single missed payment either, Bank of America says. Rather, a missed payment will simply trigger a review of the account in question. Whether or not a penalty rate is actually assessed depends on a customer’s risk profile—how risky the issuer considers the consumer to be based on income, debts and liabilities, overall payment history, and other factors.
Consumers, experts say, would therefore have no one but themselves to blame if they end up paying a 29.9% interest rate.
“There is absolutely nothing wrong with Bank of America’s decision to implement penalty APRs on future balances based on missed payments and consumer risk,” said Odysseas Papadimitriou, CEO of the credit card comparison website, WalletHub. “This is not a bait-and-switch tactic or a reinvented version of the gotcha-type techniques that were so popular prior to the CARD Act. Consumers will be well aware of the risk before making purchases under these terms, and if they choose to continue spending despite a near-30% interest rate, they merely validate Bank of America’s reasoning in applying the penalty terms in the first place.”
Bank of America is simply being transparent about a policy that the majority of other issuers might already have but aren’t publicly disclosing. The company’s decision to announce this penalty rate structure before implementing it actually speaks to Bank of America understanding the importance of clarity in the new credit card landscape, according to Papadimitriou.
“This 29.9% interest rate on future balances is Bank of America’s way of telling consumers, ‘We don’t want you using our credit cards anymore,’” he said. “Contrast this to the pre-CARD Act days when credit card companies could freely increase the interest rates on existing balances, leaving consumers to bleed dry due to unpredictably high interest costs.”