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Libor and your credit cards

By Janna Herron ·
Friday, July 6, 2012
Posted: 3 pm ET

Say, have you heard about that Libor scandal?

That's the one where Barclays allegedly manipulated a key benchmark interest rate called the London Interbank Offered Rate to try to boost investment-banking profits from 2005 to 2008. The rate helps set interest rates on many consumer loans, such as mortgages, auto loans and credit cards. What about your credit cards?

Probably not. (But other U.S. loans may be affected.)

"Libor is a little used benchmark in pricing (variable-rate) credit cards," says Greg McBride, CFA, senior financial analyst at Bankrate. "The prime rate is the predominant index used in pricing (variable-rate) credit cards."

The prime rate, published by The Wall Street Journal, is a consensus rate from the 10 largest U.S. banks. It's tied to the federal funds rate set by the Federal Reserve's policymaking committee and changes when seven of the 10 banks change their rates.

Even cards Barclays issues to U.S. consumers are tied to the prime rate, at least now, according to the issuer's card agreement on file at the Consumer Financial Protection Bureau. In fact, none of the agreements in the CFPB's online database mention Libor, according to a text search.

Of course, this doesn't mean all U.S. credit cards issued during the rate-fixing scandal didn't tie their rates to Libor. So, there's a remote possibility that your credit card -- if tied to the Libor index -- was affected by the rate manipulation.

It's also slim that one bank could materially change the index, says McBride. The rate, which is an average, is derived only after the four highest rates and the four lowest rates are discarded, leaving the rates from eight banks, he explains. Basically, several banks would need to be in cahoots to effectively rig the rate.

"And it's far from clear if there's any impact on consumers, much less if that impact was positive or negative," he says, since Barclays allegedly submitted false rates on the high and low side.

To put your mind at ease, just pull out your credit card agreement to find out which index your variable rate is linked to. I'm betting it's the prime rate.

Are you following the Libor scandal?

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