Today, Dr. Don discusses brokered certificates of deposit and explains how credit card companies can impose interest rate increases on customers, even those with good credit.

Brokered CDs

Dear Dr. Don,
What can you tell me about brokerage CDs? I plan to sell government bonds that I've held for more than six years because I have been losing the invested amount. My financial Adviser recommends buying a brokerage CD. I would like to know more about them before I give him the OK to do it.
Les Risk

Dear Les,
When interest rates go up, bond prices go down. You haven't suffered a loss in your government bonds unless you recognized that loss by selling your position. Government bonds encompass a wide range of debt securities from risk-free U.S. Treasury bills, bonds and notes to government agency securities that may or may not carry government guarantees concerning the repayment of principal. Barring a financial catastrophe, you will receive the face value of the bond when it matures.

Bond trading is an expensive proposition for small investors. The transaction costs are very high, which for small holdings will dramatically reduce your yield. Let's say you own $10,000 face value of a 10-year Treasury note, which had a coupon yield and yield to maturity of 6 percent when you bought the note. You're receiving $300 in interest every six months. If your broker charges you a $70 commission to sell the position, your yield for the year has been reduced by almost 12 percent, to 5.30 percent. That's before you consider whether you got a competitive price on the sale of the bond.

What's a brokerage CD? It's a certificate of deposit sold for the bank by a broker. Some banks use brokers as sales representatives to find investors willing to purchase CDs from their banks. Brokered CDs often have higher rates than CDs from your local bank, because banks using brokered CDs compete in a national marketplace. But the value of the CD will also fluctuate with changing interest rates. Your money is FDIC insured, and you'll get your principal back when the CD matures, but that doesn't mean that the price of the brokered CD can't fluctuate over the holding period.

Rising credit card rates

Dear Dr. Don,
In October, my Visa card provider informed me of a change in my account with a notice separate from my monthly statement. The interest rate was changing on my credit card from 14.9 to 16.4 percent. Since I've never been late with a payment or bounced a check, I thought that it was because of changes in the prime rate, so I accepted their terms.

In my February statement the interest rate had suddenly gone to 23.99 percent! When I called the bank, they said a notice was sent with my November statement. Given that a rate change notice was sent in October, I didn't expect a second rate change notice in November. I immediately canceled my card and demanded an explanation for the second increase. The bank's response was that I had too much credit available and my outstanding balances were too high.

When I received my credit report, there were no late payments or bounced checks -- in fact, all reports read paying as agreed, not late in last 36 months! Nothing negative on my account!

My question is this: How can I get the credit card company to put my rate back to 16.4 percent I agreed to? I feel like I've been ambushed and don't know what else to do -- the company insists I'm responsible for the new rate, even though I have canceled the card and had not charged anything since September.
Rick Rates

Dear Rick,
From the situation you've described, you got a raw deal from your bank. But canceling a credit card isn't the same as closing the account. Canceling the card just means that you can't charge any new items on the account. The account still exists and you will still rack up finance charges at the prevailing interest rate on your credit agreement. You need to vote with your feet -- find a new credit card to transfer the balances from the old card. If your credit is as good as you say, you won't have a problem finding a new credit card provider. You can shop cards at Bankrate.com's Best Annual Percentage Rate when intro rate expires page.

A card issuer is only required to give 15 days notice of a change in terms. You don't agree to a rate when you receive notice of a rate change. You agreed to the rate and any subsequent changes when you applied for the credit card.

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-- Posted: May 24, 2000