Fixed-rate credit cards ‘a dying breed’?
Posted
Jul 16 2009, 06:36 PM
by
Karen Datko
Rating:
Bank of America, Chase and other credit card companies are changing an undisclosed number of their fixed-rate credit cards into variable-rate cards.
Chock it up as yet another way the card companies are positioning themselves to protect profits before a new federal credit card law takes effect. The new law limits when card companies can raise the interest rate on credit cards, but those rules don't apply when the increase is tied to a variable rate.
"The fixed-rate-type cards are a dying breed," Curtis Arnold, founder of CardRatings.com, told MarketWatch. About 66% of credit cards in use came with a variable interest rate before the card companies announced they were making the switch, The Associated Press reports.
If your fixed-rate card is converting to a variable-rate card, here's what you need to know:
- The interest rate is tied to the rise and fall of the prime rate (see below). The company uses a formula -- prime plus, say, 5% -- to set the interest rate on variable-rate cards.
- Your rate could change month to month, depending on what the prime rate is.
- Credit card companies can set a bottom limit on their variable rate, no matter how low the prime rate goes (and it's a remarkably low 3.25% or so right now). More companies are adopting the so-called floor on variable rates.
What does prime rate mean? David Lazarus of the Los Angeles Times explains:
The Federal Reserve's Federal Funds Target Rate, which is used by most banks as the benchmark for the prime rate, is now around 0.25%. Banks typically tack 3 percentage points to the Fed's target rate, which is how we get the current prime rate of 3.25%.
"Smithee" at Consumerism Commentary said customers likely will be offered the choice of opting out of the variable rate, but if you do, you'll probably have to close the account, which could ding your credit score.
Or you can call to ask about keeping your fixed rate, which is normally reserved for the best customers. "The last time our readers encountered this widespread kind of change, they had a surprising amount of luck getting their original terms back by calling and talking to the right people, in the right way," Smithee wrote.
Better yet, pay off your balance. Then it doesn't matter what the interest rate is.
Related reading:
Banks have declared war -- on you
Sneaky changes to your credit cards
Chase raises minimum payments on credit cards
Credit card rates, fees soar as new law looms
