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My Very Own Risk-Based Repricing Experience

posted by Adam Levitin

People sometimes assume that I have a personal issue with credit cards because I write a lot about the card industry and often argue that its practices are harmful to consumers and to general welfare.

I really don't. I just think they are an amazing laboratory for examining contractual relationships and bargaining power. Frankly, I'm surprised that more people don't study them, because they are the most ubiquitous type of consumer contract and are at the very core of the network of contracts that makes up our consumer economy.

This week, however, it got personal. I fell into the card industry's billing practice traps. And the funny thing is that this is because the card issuer screwed up. In the end I don't actually owe any money (alas, there's still some issues to resolve)--but I could have very easily ended up paying a lot of money I didn't owe. The ridiculous twists and turns in my saga are illustrative of the serious problems that exist with credit cardholder agreements and why there needs to be legislative limits placed on the terms of these agreements.

Last month I saw a large charge on my Citibank Amex from PACER, the federal courts' on-line docket system. I have court orders from a number of courts that granting me exemption from PACER fees, so I knew the charge amount was incorrect. I didn't have an itemized breakdown from PACER, however, so I didn't know exactly how much of the charge was incorrect.

I called Citi and disputed the charge. The charge is a billing error under 1512 CFR part 226.113(a)(1). [Correction: Reg Z is in 12 CFR, but it is under TILA, which is in Title 15 of the USC.] Unfortunately my dispute did not compute in the Citi system. Because I was contesting an unliquidated amount of the charges, however, my case didn't fit into one of their eight dispute check boxes. (Note that Reg Z does not require that I know the amount of the error. See 15 C.F.R. Part 226.113(b)(3).) Finally, after speaking to a supervisor, I just decided to dispute the entire amount because that was the only way I could go forward with a dispute given the unbending parameters of Citi's computer system. I also contacted PACER to make sure that they had processed all my fee exemptions.

Fast forward to earlier this week. I still hadn't heard anything from Citi or PACER about the dispute's resolution. But, to my great surprise this month's Citi statement arrived. It says that I owe the full PACER balance and there's a finance charge tacked on for the disputed amount.

When I called Citi to inquire, I was told that I hadn't disputed the charge the previous month. This was in spite of fact that there were numerous notes about the nature of the dispute in my file. In other words, Citi had taken down all sorts of details about my dispute, but never actually processed that I was disputing the charge. Citi entered the dispute a month late, and only after I called to check up on it.

Well, Citi has now (supposedly) removed the finance charge and recorded the charge as contested. But Citi tells me that I need to submit documentation about the dispute or the charge will be reinstated. That means I have to send some 50 pages of court orders to Citi at my own time and expense for a merchant's mistake. The duty to investigate a billing error is Citi's. Nothing in Reg Z requires that the cardholder submit written documentation to the card issuer at my own expense. [Clarification: Reg Z requires written notice of a dispute, although card issuers frequently treat a phone call as adequate notice. But Reg Z does not require the provision of supporting documentation.] So why am I footing the bill? (Maybe there's language to that extent buried in my cardholder agreement...)

So what comes out of my own personal sob-story? Five major problems.

(1) It remains unclear to me whether my credit report will show a late payment now. Citi is not permitted to report me if the bill is in dispute. But the dispute was registered a month late because of Citi's mess up. The Citi customer service reps I spoke to were so incompetent (and my suspicion is that they were based on the other side of the world) that it was pointless to try and get this sort of issue straightened out with them. Thus, I might have been reported during the time when I had disputed the bill, but Citi hadn't yet recorded the dispute. I don’t have any control over the reporting. The only way I can learn if reporting happened is to get a copy of my credit reports (and I only get one free copy per year) to verify that I have not been reported as late, and if I have been, then I have to challenge that…all at my own time and expense and with no guarantee of a correction. We really have misplaced burdens in the credit reporting system.

(2)-(3) My (supposed) unpaid balance was $176.96. My nominal APR is 11.49%. For a 29 day billing cycle, compounded daily, this should mean a finance charge of $1.62. Instead, I was hit with a finance charge of $14.27. That means my effective rate was 101.211%. Wow! That's never disclosed on my statement. I had to go play with a compound interest calculator to figure it out.

Where did the extra $12.65 in the finance charge come from? Well, it turns out that my finance charge was not based on my actual balance. Instead, it was based on a "Balance Subject to Finance Charge," which is "the average of the daily balances during the billing period. If you multiply this figure for each balance by its daily periodic rate and by the number of days in the billing period, the result is the total periodic finance charge on that balance. Rounding may produce a small difference.”

The result is that I am paying a finance charge not just on the $176.96 that Citi claims I owe, but also on the $2,661.33 I paid off from the previous month’s balance (pro-rated for the 16 days of the cycle I owed it before payment was credited). Citi claims that this yields an average daily balance of $1,563.42, but I can’t get the math to work (and I’m a former mathlete). And I’ve even tried rounding. (Gee, does Citi round my balance up or down, I wonder?)

There are two serious problems here. First is that Citi is calculating my balance in a way I cannot replicate, even after playing with different methods for half an hour, and this is what I do for a living. [Clarification: Calculating the finance charge should be pretty easy to do, but I don't get the same numbers as Citi, regardless of the permutations I attempt.] Most people don’t have the interest or that type of time to waste on verifying that they are being billed correctly by their card issuer. They just have to take it on faith that their card issuer isn’t making mistakes or doing aggressive “rounding” or worse. This should all be computerized, but given Citi’s incompetence elsewhere in its dealings with me, I don’t have a lot of faith in the accuracy of their calculations (or alternatively in their disclosure of their methodology).

Second, this isn't double-cycle billing, but it is just as bad. I should only be paying interest on my actual balance. Or if I'm not, the disclosed APR should reflect the effective APR on the balance I actually pay. Citi is one of the cleaner issuers, and they're not above a practice like this.

(4) The late payment to Citi might trigger cross-default clauses or unilateral term changes on other cards. Here I am with federal court orders saying that I do not have to pay certain charges that are on my Citicard, and I properly disputed the charges, yet I could be hit with higher interest rates from other card issuers because Citi messed up. Citi's incompetence could lead to me having to pay more to Bank of America or Capital One or Chase or Wachovia. This is risk-based repricing. If other card issuers raise their rates on me, I wonder if they'll change them back after Citi corrects the error? If I had a balance, would a downward adjustment in interest rate be applied retroactively to existing balances? Is risk-based repricing a two-way street? Or is it like the rounding? My guess is that the house always wins.

A less assertive cardholder than I would have just lumped it on the $14 finance charge from Citi. Fortunately, I don't have any balances on other cards, but for a lot of other Americans, Citi's negligence could have cost them a lot of money, and there'd be no realistic recourse against Citi. What happened to the basic tort principle of the least cost avoider bearing the risk?

(5) I was sufficiently frustrated from all of this that I considered closing the account. But that would hurt my credit score. And I those $33 cashback dollars that I've accrued would be forfeit--Citi won't cut checks for less than $50. Citi screws up and it will cost me $33 and a hit to my credit score to sever my relationship with them. So here I am, locked into Citi despite its incompetence. Ouch. This shouldn't be.

* * * * *

As it turns out, today PACER contacted me to tell me that they had made a mistake and were issuing me a credit. So maybe this will all get resolved neatly. But that is only because I’m diligent with my record keeping and assertive about billing errors. Not every consumer is so diligent or assertive.

The next time consumer witnesses are blocked from testifying to Congress about credit card billing practices unless they sign a broad, last-minute waiver of their financial privacy rights, I'm happy to walk across the Mall and sub-in. I'll sign any waiver given to me. And maybe the card issuers will have to show their math and books in return. I’m still flummoxed how they calculated my finance charge.

Updated 3.30.08


You left out one other tactic, removing their income stream. I have a couple of credit cards, but only one that gets regular use. When I have had a problem with my card, I follow this strategy:

1. Call the card company to have it resolved and to have the finance charges waived.

2. Immediately stop using the card.

3. Immediately pay all of the unrelated charges on the card, and I mean immediately, not when the bill comes. Go online and pay electronically.

Then I use one of my other cards until I am sure everything is resolved.

My strategy achieves a couple of positive outcomes. First it limits to the greatest extent possible the finance charges that come about from my unrelated balance (which you noted in your article were the bulk of your charges).

Second, it causes immediate lost business for the card issuer. I'm no longer using the card, and that business is going to some other company. I count that as a positive. In your case above, things were a net zero for your card issuer. You didn't let them take advantage of you, but their business went on unmolested and all they had to do was fix it after the fact. I always remove my business straight away.

Finally, the value of contention is often relatively small as yours above was. If my balance is paid, and there is nothing new charged to the account, it suddenly becomes a non-winner for them. It's costing them time to investigate and handle my dispute but the account has quit creating revenue. I don't know, but I expect that internally they are very practical about these things, and I've tried to make it as tempting as possible for the card issuer to just quit fighting and see things my way.

I may not be a "credit expert", but I have never had a credit card company fail to see things my way, even when it was my fault (forgot to pay bill on time, etc.).

(1) It remains unclear to me whether my credit report will show a late payment now

What late payment? As long as you paid at least the minimum balance, there is no late payment, just a loss of interest-free status -- This should definitely not hurt your rate on any other borrowers.

I have a citi mastercard. Anytime I call with a billing problem (about 1/year) they usually correct it in a day. Of course I'm usually very nice and don't overwhelm the CSR with a zillion confusing facts trying to prove how smart I am and how right I am.

Next time try remembering who you're dealing with and treat them kindly and start with easy to understand basics. Go slow and let them come to the correct conclusion on their own. That way you'll have them on your side. Once that happens the grease will start to make things slide your way.

Ted, I'm glad that you've had nothing but good experiences with Citi, but what relevance does that have to the issue? And why would you assume that I was anything other than nice or trying to prove my intelligence to some poor Citi call center shmoe? (Other folks seem to think I spouted statutory cites at Citi...no, that's only for educational purposes on the blog.) I was trying to get this problem worked out, not to end up with fodder for a blog post.

Regardless, though, this system shouldn't depend on me being nice to Citi--even jerks have rights, and Citi's system is hardly designed to bring out the best in people.

Re: This is off topic, but you brought it up. When the credit card witnesses were required to sign waivers of financial privacy, why weren't the credit card executives required to sign the same waiver?

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