Dear Credit Card Adviser,
A lot of credit card companies seem to be changing fixed-rate cards to variable rates. Does the new credit card law treat these types of rates differently?
Some issuers have converted a portion of their credit card fleet from fixed rates to variable rates, including Bank of America and JPMorgan Chase. Discover Financial Services changed some cards to variable rates last October and Capital One followed suit earlier this year.
The switch makes sense when you consider imminent credit card regulation and the low U.S. prime rate, which serves as the index for most variable-rate cards. That base rate plus a margin makes up the annual percentage rate.
"We typically see some movement in the pendulum at this point in the interest rate cycle anyway as card issuers position their portfolios for an eventual increase in interest rates," says Greg McBride, senior financial analyst at Bankrate.com. "But I think we will see a greater than normal movement from fixed to variable because of the looming credit card legislation."
McBride says that currently about 66 percent of credit cards are variable rate. That ratio climbed to 70 percent in the last decade, and he believes it could rise as high as 75 percent.
One reason fixed-rate cards might not disappear altogether: competition. Some issuers may offer them to stand out in a variable-rate market, says CEO Bill Hardekopf of Alabama-based LowCards.com.
What does a switch to a variable-rate card mean to you under the new law? Cardholders generally must receive 45 days' advance notice before a change to the interest rate takes place. This provision takes effect Aug. 20 this year. No notice is required, however, for variable-rate increases tied to index shifts. Consumers will have to -- and should -- check their interest rate on their credit card statement each month for changes.
Applicants approved for new variable-rate cards also aren't shielded by a provision in the Credit Card Accountability Responsibility and Disclosure Act that restricts rate increases during the first year after account opening. Rate upticks due to moves in the index can be passed on to variable-rate cardholders inside the first year -- even during the promotional rate, according to Chi Chi Wu, a staff attorney at the National Consumer Law Center in Boston. Promotional APRs must last at least six months.
McBride says that the interest rate itself is just as important as whether it's fixed or variable, and advises debtors to pay down balances quickly. "Even if the card isn't switching to a variable rate, understand that rates are only going to go higher for the foreseeable future anyway," he says.
Use our pay-down calculator to determine your debt-free date or compare low-interest cards on Bankrate.
When interest rates eventually peak, more fixed-rate cards may return. As rates decline, issuers may switch variable-rate cards to fixed rates or institute minimum rates, also known as floors. The law doesn't bar such switches.