Friday, December 19, 2008

When Citi Doesn’t Like You

I’m a member of the satiric Christmas rock band Bah & the Humbugs. We have written way more Christmas songs than any sensible band ever would. One of them, “When Santa Doesn’t Like You,” written by Gayden Wren and Paul Nordquist, describes the various pranks you might suffer if you get on the wrong side of Santa Claus. I forget exactly what they are. You might get Jell-o in your Christmas stocking, or something like that. The moral of the song, I guess, is something about not being naughty.

As bad as it might be if Santa doesn’t like you, it’s even worse if you hold a Citi card and Citi decides it doesn’t like you. It can change the interest rate on your credit card to a default rate, which is typically something like 28.99 percent.

How can Citi change your interest rate just because its opinion of you changes? It’s an obscure provision in the credit card terms that in the industry is known as “universal default.” This provision says that if you are ever late with a payment on anything, the bank can instantly change your interest rate to a much higher rate, the penalty rate, or default rate as it’s usually known. This provision is more draconian than it sounds — because the fine print says Citi can apply this provision in its sole discretion, which basically means its opinion. You don’t even have to owe any money to anyone to get the default rate. If Citi thinks you owe money to someone and should have paid it by now, it can change your interest rate. If Citi hears a rumor about you and decides it might be true, it can change your interest rate.

There is no moral to this story. There is nothing you can do to ensure that you won’t have to pay the default rate except not to have a card that comes with this provision.

As far as I know, Citi was the first large bank to come out with the universal default provision, and many other banks followed. I had to cancel most of my credit cards. I don’t know why I wasn’t hearing that everyone was canceling their cards — but I know I wasn’t the only one who thought it was wrong that a bank could change my interest just on a whim.

Even the U.S. government has finally decided it was wrong. Federal regulators voted yesterday on some long-overdue new rules for credit cards. AP calls them “sweeping.” That is perhaps an exaggeration, but they do rein in some of the most flagrant abuses by banks, including universal default. When the new rules take effect, if Citi decides it doesn’t like you, it will have to get your permission to change your interest rate.

Of course, if you’re ever a day late with a payment, you’re on your own. A bank can change your interest rate if you’re ever late on any payment to it, even if you’re late because of something it did wrong. The best bet is still to pay off credit cards early and often.