Consumers lose when rates hit credit card 'floors'
For many credit card customers, the rate cut party of 2001 is over,
no matter what the Fed does.
After nine Federal Reserve Board rate
cuts in 10 months, many variable-rate card customers are hitting
the floors, or minimum APRs, allowed in their cardholder agreements.
Once you've reached the floor of a card
agreement, your interest rate is finished falling. It doesn't matter
what rate cuts Alan Greenspan has up his sleeve. Your interest rate
free fall is over.
"It's gone as low as it's going
to go," says Catherine Williams, president of Consumer
Credit Counseling Service of Greater Chicago.
The variable floor
About 70 percent of all credit cards have variable rates. Some variable-rate
credit cards have floors. Others don't.
Twenty-four percent of variable-rate
credit cards surveyed by Bankrate.com have floors. Seventy-five
percent of those cards had hit their minimum APRs as of Oct. 3.
"I think it's safe to say the ones
that haven't will hit them soon," says Greg McBride, an analyst
Issuers that place floors on variable-rate
card accounts include Bank One/First USA, Wells Fargo and Household
Bank. Chase Manhattan places floors on some of its variable-rate
cards. And Capital One, renowned for its fixed-rate card deals,
issues some variable-rate cards with minimum APRs and some without.
Frank Martien, a senior consultant at
First Annapolis Consulting, estimates that one-quarter to one-third
of all variable-rate cards have floors.
Not sure if that variable-rate card
in your wallet comes with a floor? You're not alone.
"People don't pay attention to
that type of thing," says James Daly, editor of Credit Card
Management, an industry magazine.
"That's the type of thing that's
in the fine print. To people's detriment, they probably don't read
Now's a great time to start. So pull
out that card agreement, grab a magnifying glass and get going.
What goes up must
The interest rate on any variable-rate credit card fluctuates with
an index. When the index shoots up, so does the card rate. When
the index slips down, down goes the card rate.
Most issuers use The Wall Street Journal
prime rate as an index. The Wall Street Journal prime rate usually
falls the day after the Fed cuts rates. Since Jan. 1, the prime
rate has plummeted from 9.5 percent to 5.5, its lowest level in
It's been a great year for variable-rate
card customers. Just how great depends on your cardholder agreement.
Some variable-rate accounts are re-priced
each month. These folks are having an especially fine year. They
felt the impact of the two January rate cuts in their February bills.
The Oct. 2 cut may turn up in their November bills.
Other variable-rate accounts are re-priced
each quarter. Because the fourth quarter began Oct. 1, people who
hold cards re-priced quarterly will have to wait until next year
to see the effects of the Oct. 2 rate cut.
Of course, people who have already hit
the minimum APR won't feel the latest rate cut at all.
And that's just fine with many issuers.
They lose less money that way. The whole point of floors, or minimum
APRs, is to protect the issuer and boost profits during periods
of low interest rates, such as now.
"The floors are there obviously
to preserve profit margins," Daly says.
People with flawed credit should be
especially watchful for credit card floors. Consider this Visa Gold
card offer from Cross Country Bank.
It comes with a $50 annual fee and a
variable APR of 20.99 percent. The card's minimum APR is 20.99 percent
as well. So the only direction the rate on this card can go is up.
The rate will never drop as long as you carry the card.
And because the card comes with no grace
period, you'll pay almost 21 percent interest on every single item
you buy with the card, even if you don't carry a balance. Yikes.
Even supposedly premium card deals may
have consumer unfriendly rate policies. Take a look at the disclosure
that accompanies the Washington Mutual Visa Platinum Card, which
is issued by Associates National Bank.
The variable-rate card is adjusted each
month and uses The Wall Street Journal prime rate as its
index. Nothing fishy so far.
But just look at this: "The Index
will be the highest Prime Rate published in the "Money Rates"
section of The Wall Street Journal within the 90 calendar
days preceding, but not including the first day of the billing cycle,"
the disclosure reads.
Timing is on their
In other words, rate cuts are delayed while rate hikes are imposed
immediately. A customer could miss out on a rate cut altogether
if the rate bounces up again in 90 days.
"It protects them in a declining
rate environment and gives them a little boost in a climbing rate
environment," Daly says. "That's a very clever little
Don't be surprised if other card issuers
roll out similar pricing schemes. They're all looking for ways to
boost profits now that interest rates have dipped.
That's all the more reason to scrutinize
variable-rate card offers carefully. A straightforward deal with
a low interest rate and no minimum APR would be ideal.
Remember variable-rate cards swing with
the economic times. They swing low when interest rates decline,
and they swing high when interest rates are on the rise.
In June 2000, variable-rate cards were
at their highest rates in four years, thanks to a flurry of interest
rate hikes. That variable-rate card that seems so fantastic today
may not be so great six months or a year from now.
"Your card could adjust so that
it's just competitive with a fixed rate card," Williams says.
"At that point it wouldn't be the card of choice."
A card customer who has hit the floor
on a variable-rate card might want to shop around right now. You
may be able to find a better deal. Your current card rate can only
"It's something to be aware of,"
Daly says. "If you feel like you can get a better rate by shopping,
go ahead and go shopping if you're at the floor."