The message on the notice from her credit card company read, “We are pleased to tell you that we have lowered the following Annual Percentage Rates (APRs) on your account. Purchases: Prime + 11.74%, currently 14.99%V.” Immediately, my colleague who received the notice assumed her card issuer was trying to pull a fast one on her, by changing her credit card rate from a fixed to variable rate.
“When rates go up, that rate is going to be a lot higher,” she correctly observed.
Before I saw the letter and discussed it with Nessa Feddis of the American Banker’s Association, I was also surprised to hear that her card issuer was switching her account from a fixed to variable rate. After all, most card issuers did that several years ago before the Credit CARD Act took effect and stopped them from changing customer’s rates at any time and for any reason.
Card issuers can still change rates, but if they do, they must follow the rules.
Generally that means they can’t raise the rate on an existing balance unless you have an introductory rate that expires, you pay more than 60 days late, or your rate adjusts because it is a variable rate – more on that in a moment. If your issuer does try to change the rate on future purchases for a different reason, it must give you 45 days advance notice and the option to decline the change and pay off your account under the current terms. (You may be required to close your account if you decide to opt out.)
Because she doesn’t carry a balance or pay interest, the cardholder who received this notice didn’t realize that her current rate was a variable rate. (Hence, the “V” next to the 14.99% rate.) So it would appear that the issuer is simply pointing out a change that occurs with variable-rate loans when the index that it is based on decreases: the APR goes down as well. To clarify, variable rates are pegged to an index such as the prime rate. When that rate changes, the APR of the card changes accordingly. The APR may change monthly, quarterly or at another interval set and disclosed by the card issuer in the cardholder agreement.
Notice, though, that under the CARD Act issuers aren’t required to send you a notice if your interest rate changes as the result of a change in the underlying index, so it will be interesting to see whether her issuer points out a rate increase when it happens. I don’t think she should count on it.
Also note that no notice is required if an introductory rate expires and reverts to the previously disclosed “go-to” rate, or if your rate increases because you missed payments under a workout agreement. That’s why it’s still important to review your statements each month, even if you are just in paydown mode.
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This cardholder is right to be concerned about what happens when the prime rate and other interest rates that credit card rates are often tied to go up. Currently the prime rate is very low, at just 3.25%. But in the summer of 2006 the prime rate was 8.25%. If it were that high today, the rate on this card would be 19.99%.
“Once interest rates go higher we will see higher rates post-CARD Act,” warns Feddis.
While we have no idea when or how quickly rates will climb, cardholders can take advantage of today’s low rates to aggressively pay down debt so that, like my colleague, they don’t have to worry about the rate they’ll pay. After all, 0% is always a good deal!
Image: ralphunden, via Flickr