Credit Cards Switch Rate Formulas

August 7, 2009
Michael Sheehan

A loop hole in President Obama's credit card reform bill ties your card rate to overall interest rates, and doesn’t require companies to give you 45 days notice of changes. This is a bonanza for card companies, but a pain in the wallet for card holders.

When President Obama signed a major credit card reform bill into law, many industry experts predicted that credit card issuers would find creative ways to get around the new rules, especially during the nine-month grace period that the law allowed. It turns out that they were right on target; credit card companies have come up with several strategies aimed at propping up credit card revenue.

In fact, card companies have found a way to bypass one of the law’s toughest provisions, which bars them from raising rates without giving a card holder 45 days notice and forces them to apply any new rates only to new purchases. In response, credit card issuers like Bank of America, American Express, Chase, Discover, and Citigroup are switching from fixed-rate cards to variable-rate cards with rates tied to market-based interest rates. Basically that means your credit card rate will rise and fall in lock step with overall interest rates and the card company doesn’t have to give you 45 days notice. It can also apply the new rates to all your outstanding debt, including new purchases.

The huge loophole in the law may be a bonanza for the credit card companies, but it’s a pain in the wallet for card holders. Interest rates on variable-rate cards are almost certain to rise as the economy improves and broad-market interest rates rise from their current historic lows. And searching for a fixed-rate card is probably not an option. Industry analysts say fixed-rate credit cards are an endangered species and soon will be all but impossible to find.