Are Variable Rate Credit Cards the Wave of the Future?
Credit card issuers are working hard to ensure that they’ll still be making profits after the new Credit Cardholder’s Bill of Rights comes into full effect in Feburary 2010. Thus, they’re making changes now.
You may have already experienced a cut in your credit line and an increase in your interest rate. After February, they’ll only be able to increase the interest rate on future purchases, not on existing balances.
They’ll also be banned from raising your rate because you’re having trouble paying a card from a different issuer. They will be able to raise the rate on your existing balance if you’re 60 days late with a payment – but bumping you up because you were an hour late will be a thing of the past.
That is, they won’t be able to raise the rate on existing balances unless you’ve chosen a variable rate credit card.
As of a July report in Bankrate.com, about 70% of all credit cards are already at a variable rate. Most believe that ratio will rise.
While the variable rate card doesn’t allow credit card companies to raise rates arbitrarily, it does give them some safeguard against offering low rates to consumers after their own “cost of money” has risen. This is because variable rates are tied to the U.S. Prime Rate.
Using the variable rate exempts the card issuer from a provision in the new law that says interest rates to individual consumers may not be raised during the first year. It could, in fact, change during the first month.
Your variable rate credit card will be a set percentage above prime – so when prime moves up or down it will change accordingly. The good news for you is that prime doesn’t usually rise as dramatically as credit card rates have in the past. It’s very unlikely that you’d see your rate jump from 10.99% to 28.99% overnight.
Interestingly, the new law does not prohibit your card issuer from switching your variable rate card to a fixed rate card without your permission.
Financial experts are predicting that when interest rates peak, more fixed rate cards will return. Then, as rates decline, issuers may either switch your variable rate card to a fixed rate or institute a “floor” on your interest rate. This is a minimum interest rate that you’ll pay even if your original agreement would have called for a lower percentage.
The new law has holes – it doesn’t prohibit switches such as these
