In an Australian first, the company is applying a form of risk-rating to its customer base that will result in a sliding scale of rates.

Miss one payment, and you lose any promotional rate you were enjoying. Miss three payments within 12 months and your current rate increases by 4 per cent per annum.

Miss two consecutive payments, or four separate ones within 12 months, and your rate goes up to 25.99 per cent for at least the next 12 months.
At the end of that time, Amex has discretion over whether it will lower your rate.

Effectively, the company is relegating those they assess as high-risk to a punitive rate. Or, in Amex's words, "we are setting rates at the customer level rather than the traditional approach of setting rates by product".
This represents a departure from how interest rates have been set in the past.

Until recently, if you missed a payment on your credit card, the worst that could happen was you'd be hit with a flat fee.

"We'll see the Australian market move to risk-based pricing over time," predicts Denis Orrock of InfoChoice. "Whether it be through a universal change to the reporting structure [to allow ratings agencies to carry it out], or institutions doing their own risk profiling."

Consumer groups are concerned vulnerable consumers will be hardest hit by the change.

Carolyn Bond of the Consumer Law Centre in Victoria says the new Amex policy goes against the industry trend to responsible lending.
"Amex is going in the direction of penalising people in financial difficulty, rather than looking at different ways they can assist," Bond says. "If you can't afford your payments at the standard rate [typically about 17 or 18 per cent], then you're not going to be able to afford them at 26 per cent."
Cardholders could be locked into a vicious circle of crippling debt with such high rates. Defaults of 90 days or more affect a person's credit history.

"You start to see real problems emerge," says Dr Nick Coates of the Australian Consumers Association.

"Customers struggling to maintain everyday expenses with the [recent] interest rate rise and petrol prices will probably start to load up their credit cards first. We've seen cash-outs and credit card debt before the last rate rise at an all-time monthly high, suggesting there are a lot of people under stress. They're the sorts of consumers who will be caught by a sliding scale."

Risk-based pricing is common practice in the US, where lending institutions are allowed considerably more access to credit records than they are in Australia.

"One of the reasons we haven't had more discriminatory rates for credit cards is because it's difficult to price risk at the outset," says Nicola Howell, the director of the Centre for Credit and Consumer Law at Griffith University. "That's one of the arguments for more detailed credit reporting."

Orrock says Amex is in effect conducting its own risk profiling. "What you're seeing is that Amex probably wants to cherry-pick their customer base by separating the good from the bad. This is a pretty easy way to roll your default risk customers up into a fairly aggressive interest rate for one year."

Nina Rinella, an Amex spokeswoman, says the company is simply trying to make sure its customers showing responsible payment behaviour are not subsidising irresponsible customers.

"The vast majority of our customers have good payment behaviour, and they're not going to be [affected]," she says. Rinella says that Amex is simultaneously offering 60 per cent of its customers, who pay on time, a reduced rate that could be "as low as 12.99 per cent".

There are still some question marks over Amex's new policy. The NSW Office of Fair Trading is considering the implications of the new policy under the consumer credit code, which imposes some restrictions on default charges.

The company says it is above board. "American Express sought the advice of several leading barristers who agreed that the policy complies with the consumer credit code," Rinella says.

"Any change in interest rate resulting from our policy is based on a review of the customer's account history ... [and is] made irrespective of whether the customer is in default at that particular time.
"Prior to any interest rate changes we would have communicated to a customer multiple times through letters, statement messages, SMS alerts and/or phone calls," she says.

Coates also cites the Consumer Law Centre of Victoria's 2004 Unfair Fees report, which questioned the legality of excessively high default fees.
"I'm surprised that [Amex] is looking at this already," he says. "I would have thought that there are some issues to be resolved about so-called penalty fees and penalty rates in Australia before these sliding scales could be introduced."

The report argued that if the penalty being charged is disproportionate to the actual administrative costs of default and is coupled with unconscionable contract provisions (such as unfair bargaining power), the fees could be illegal.

No one has challenged the banks in court on late fees yet. But there is evidence of a shift in policy in the United Kingdom, with its Office of Fair Trading recently outlawing sliding scale hikes by imposing a low, flat-rate limit on late fees for credit cards.

Andrew Willink of Cannex doubts that many Australian institutions will follow Amex's policy. He likens it to insurance, where customers who make few or no claims are rewarded with lower premiums (and vice versa).

"It's a behaviour rate," he says. "If you behave in a regular pattern according to the contract, you'll benefit from the fact that your interest rate is lower."

But the system will introduce more complexity, he says.
"With finance products now, fees and interest rates are blurring together, so you don't know [the true cost] - and that's the difficult thing," he says.
Consumer groups are concerned the move may prompt other institutions to introduce similar rate hikes.

"We don't want to see this system being developed in Australia," Coates says. "We believe that it disadvantages struggling consumers who are over-committed with their debt."

To avoid trouble, understand all your credit card terms and conditions.
"Make sure you're very aware of what arrangements are in place if you do default," Howell says.

"Research of behavioural economics indicates that people always take a positive view of how they're going to behave. They don't expect they're going to default, therefore they don't pay much attention to what the default arrangements are. So be realistic about your credit card use."