By Justin McHenry

Citi announced last week its intention to remove clauses in its credit card contracts that have made it easy to jack up rates at any time, sometimes to the bewilderment of cardholders. Citi will drop the clause in its card agreements that previously gave them the right to increase card interest rates when cardholders were late on payments unrelated to their credit cards, such as utility bills—a practice referred to as “universal default.” In addition, Citi will give up the right to simply raise rates “at any time for any reason,” saying it will now only raise rates at card renewal times, unless a cardholder is late for a payment, over the card’s limit, or if a check bounces.

While the number of cardholders who have ever been subjected to universal deafult or other sudden interest rate increases is a small percentage of the whole, the change in interest rates can be drastic, in some cases more than doubling the previous rate. In addition, these interest rate hikes disproportionately affect poorer cardholders, those who already are having trouble making payments.

Practices such as universal default and two-cycle billing (calculating interest on the average balance over two months instead of only the current month) have recently come under increased scrutiny by the newly-elected Democratic Congress. Citi’s changes, as well as Chase’s abandonment of two-cycle billing last month, may be an attempt by card companies to clean up the more egregious clauses in their contracts in order to avoid increased regulation of the industry.

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