Credit card rates start to climb

Plastic is just not looking as attractive as it was a year ago.

Thanks to the rate hikes from the Federal Reserve last year, some credit cardholders are already paying higher interest on their balances. Others are being switched to variable-rate cards. And the flood of those enticing zero-percent introductory and balance-transfer offers is expected to taper if interest rates continue to rise, according to several industry watchers.

Expect variable rates to climb as card issuers catch up with the Fed's rate moves. The Fed has increased short-term rates by a total of 1.25 percentage points since June of last year, and is expected to continue bumping them up this year.

But if card issuers move in anticipation of future increases, fixed-rate cardholders could see larger jumps in their interest rates, says Evan Momios, equity analyst for Standard & Poor's Equity Research Services.

"The consumer is going to be paying higher rates on outstanding balances, without a doubt," says David Robertson, publisher of the Nilson Report, a payment systems newsletter.

And what about those great, low introductory rates?

Expect to see "fewer and fewer zero-percent teaser rates," says Momios.

While you're "not going to see those offers disappearing completely, you're not going to see the volume you've seen in recent years," he says.

His prediction: Card issuers will use rewards like frequent flyer miles and other goodies, instead of no-interest offers, to lure new customers.

"This is where the consumer will also see a difference," says Robertson. "Balance transfer offers will also be variable. And the period for which they are fixed is going to be curtailed -- a year or six months, rather than the life of the loan."

Janis Tarter, vice president of public affairs with Citi Cards, agrees. The company has some zero-percent offers now, she says. "Going forward we expect to have fewer and the time frame might be shortened, probably not as much as a whole year."

How it hits your wallet
Not everyone agrees that the interest rate hikes will affect credit card APRs immediately. "At this point, I don't think [Fed increases] will have a whole lot of effect on the credit cards," says Linda Sherry, spokeswoman for Consumer Action, a national nonprofit organization.

Whether your APR moves up, or how much, will depend on which card you have and where your interest rate is now.

"Our rates are probably going to be different for individual customers," says Jim Donahue, senior executive vice president for MBNA America Bank. "I don't think you can imagine they will be in some lockstep fashion to what the Fed is doing."

If you have a variable-rate card, you may be affected the least initially. Often variable rates float based on the prime rate. Many card issuers use the highest rate posted in the Wall Street Journal for the previous month. So a quarter of a percentage point increase in interest rates means a proportional increase on your card in the coming months.

While a quarter of a percentage point climb on a card is usually not that significant, the strain for consumers comes if rate hikes are repeated. "You may not feel it when the Fed is moving in quarter-point baby steps," says Bankrate.com senior financial analyst Greg McBride. "Move it half a dozen times this year, and that's when the cardholder will begin to feel it."

And penalty rates (what you pay if you get zapped by your card issuer for "bad behavior") can also increase with the prime rate, says McBride. "So if the Fed raises interest rates, your penalty rate can rise."

Fixed-rate cardholders aren't immune, either. With credit cards, fixed rate isn't really fixed, as it is with things like home or auto loans. Card issuers can raise the rates as long as they give you notice in advance. Typically, "the change of terms is inside the statement envelope," says Matthew Park vice president with A.G. Edwards & Sons. "Next time you use it, you've agreed to the terms."

With a fixed-rate card, much will depend on your issuer and where your rate is now. If you don't have one of the super-low rates, you may be insulated from the shock of a few small hikes, says McBride. "Especially if you're paying an above-average rate."

Fixed-rate increases won't necessarily mirror the fractional-point Fed hikes, says Momios. Card issuers "are anticipating that there are going to be further rate increases and they want to be ahead of the game," says Momios. "And they don't want to send a letter to their customers every month.

"So if this is correct, you should expect fixed rates a year from now to be higher than [rates of] a variable card," says Momios.

The last time the Fed raised rates, during 1999 and 2000, the average fixed-rate APR went from 13.14 percent to 16.66 percent in just one year, says McBride.

What you can do
You do have choices if the card company raises your rates or switches you to a card you don't want.

If your fixed rate has gone up, or your variable rate is increasing faster than the prime rate, call the card company and try to negotiate a better deal. If you can't, see if your agreement will allow you to pay off the card under the old rates, as long as you don't use it.

Last option: Switch your balance to a company that will treat you well.

So what if the credit card company wants to switch you from a fixed-rate to a variable-rate card? You're far from powerless.

For instance, MBNA will allow cardholders to pay off the remainder of their bills under the old terms, provided they don't use the card, says Donahue. If they do use it, then the new terms automatically take effect. Customers also have to notify the company of their intentions in writing, says Donahue.

The best advice: "Shop around for a lower card rate," says McBride. "But at the same time, aggressively pay down that debt."

Dana Dratch is a freelance writer based in Atlanta.