WASHINGTON — In response to congressional pressure to reduce fees and interest rates, Citigroup Inc. plans to stop a controversial credit card practice commonly referred to as universal default, a source at the New York company said Wednesday.
Citi plans to offer all current cardholders a new two-year contract immediately that locks in interest rates unless customers pay late, go over the credit limit, or pay with a bounced check, according to a
If a customer’s credit quality deteriorated with another creditor, Citi would not raise the customer’s rate — the practice defined as universal default, the document said. Related Link
The announcement is significant because card companies have repeatedly defended the general practice of risk-based repricing in which customers’ rates can increase when they default on other loans — causing their credit quality to decline.
Card practices have been the subject of increased scrutiny on Capitol Hill recently. Senate Banking Committee Chairman Christopher Dodd held a hearing Jan. 25 on credit cards that focused primarily on universal default and double-cycle billing. The Connecticut Democrat urged card companies to curb their practices or face legislation.
Sen. Carl Levin, the chairman of the Senate Permanent Subcommittee on Investigations, has launched a massive probe of card practices and is scheduled to hold his first hearing on the topic Wednesday. Citi, Bank of America Corp., and JPMorgan Chase & Co. are scheduled to testify. The Michigan Democrat has said he plans to introduce legislation on cards this year.
The Citi source said the decision to end the practice was made predominantly in response to Sen. Dodd.
“This is being driven by Chairman Dodd, because he’s been the most outspoken legislator on credit card issues hands down. He goes back a longer way than Levin does, and he is the chairman of the committee with jurisdiction,” the source said.
Citi said a spokesman was not immediately available for comment.
But the source also said that Sen. Charles Schumer and House Financial Services Committee Chairman Barney Frank have expressed interest in credit cards, and that Sen. Levin’s hearings could pose reputation risks.
“This is part of Citigroup’s desire to be the best-practices industry leader — part of the effort to get out front on an issue. We hear the message. This will allow us to be a better company,” the source said.
If other companies followed suit, it would help take the heat off legislation, the source said. “I think if other companies make similar reforms, it will make for a more focused debate on what could or should be done legislatively.”
Some companies have already changed practices. The week before Sen. Dodd’s hearing, JPMorgan Chase announced it would cease double-cycle billing, in which interest is charged on the sum of the average daily balances for the two previous billing periods.
