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Report: Citi may bring back universal default, ‘any time, any reason’ rate hikes

Daniel Ray

Amid fanfare and praise, credit card giant Citi announced in March 2007 that it was dropping two practices widely scorned by consumers and regulators: “universal default” and “any time, any reason” rate changes.

Doing so hasn’t brought a boom in business from grateful consumers, so Citi is considering bringing it back, according to a report today in the New York Times.

The Times cites unnamed Citi executives as its sources for the report. It quoted the executives as saying a decision on the return of the policies could come this week.

If so, it would be a reversal of a policy it touted loudly. In Citi’s original announcement, Vik Atal, chairman and CEO, Citi Cards NA, said: “We believe that making changes to what have been — until now — basic credit card practices is proof of our ongoing commitment to put our customers first. We at Citi are committed to creating a positive experience for our customers.”

At the time, the move won praise from two key Democrats who were considering tougher regulations against the practice. “Citigroup’s decision today is a positive step that I would urge other issuers to take,” said Sen. Christopher Dodd, chairman of the Senate Banking Committee.

Rep. Barney Frank, chairman of the House Financial Services Committee, also praised the move. “Eliminating universal default and unilateral changes in terms and conditions are important steps toward reforming industry pricing policies, and I appreciate Citigroup’s newly announced revisions in credit card practices. I hope other issuers will follow Citigroup to end practices that can be unfair and costly to consumers.”

Citi, the third-largest credit card issuer in the United States, proudly compiled all the praise for reporters. In March 2008, No. 2 issuer JP Morgan Chase followed Citi’s lead and also dropped universal default. Bank of America, the largest issuer of general purpose credit cards in the U.S., says it doesn’t practice universal default.

Citi had hoped dropping universal default and “any time, any reason” pricing would win it new customers. John P. Carey, the chief administrative officer for Citigroup’s credit card unit, admitted to a congressional panel in April that it hadn’t happened.  “We hoped and expected that these two points of differentiation would lead customers to vote with their feet,” he said. “We have been disappointed with the results we have seen so far.”

Universal default is a practice under which a bank can raise the interest rates on a credit card when a cardholder is late on a payment to another company, or has in some way negatively impacted their own credit score. The higher rate is applied not only to new charges, but existing debt. Banks defend it as a necessary risk management tool, but it has been criticized as unfair by consumer advocates, legislators and federal regulators.

There is both legislation and regulation pending to ban the practice.

Another part of its pledge in 2007 was to drop “any time, any reason” rate hikes, under which it can consider anything it likes, including general market conditions, when changing rates.

The market conditions for Citi have deteriorated sharply since it made the pledge. In the first quarter of 2008 alone, the financial giant lost $5 billion, wrote down another $15 billion in assets and announced layoffs of 9,000 employees. On March 1, 2007, the day it announced the policy, its closing stock price was  $51.08. Today, it opened at $18.85.

See related: House introduces Credit Cardholder’s Bill of Rights, Chase kisses universal default goodbye, Federal regulators back rules to end “deceptive” credit card practices

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