If you have a credit card, you’ve probably gotten a letter or email notice informing you of changes to your credit card account. I’ve gotten one for each of my credit cards. They both said that my current interest rate would remain the same but the formula was changing to a variable rate instead of a fixed rate. I knew that I needed to look into this more, but it kept slipping further down on the to-do list. Then my friend mentioned that one of his cards was changing his interest rate from the single digits to the high 20 percents. Yowzee! That got me really interested. Here’s what I found out:
It seems that the Credit Card Accountability, Responsibility and Disclosure Act of 2009 has a provision that governs how banks and credit unions can change the interest rates on cards. Previously, a card issuer could change the interest rate on a fixed rate card by giving the borrower proper advance notice. Under the new law, a fixed rate is a permanent fixed rate – it can’t be changed. A variable rate, which is structured to be tied to an outside rate, like the prime rate, can and will fluctuate as the markets change.
Most of the major banks and credit unions are saying that they felt forced into this change by the provisions of the Credit Card act. I can see the point that banks can not be tied to offering the current (historically low) rates forever. At some point, the banks’ cost of lending will rise and they will need to raise credit card rates accordingly.
On the other hand, it seems like some banks are using this opportunity to reset their customers’ interest rates excessively high. If you find yourself in this situation, you have a few choices: transfer your balance to a lower-rate card, pay off your balance, or live with the change. There are pros and cons to each option. Obviously, the best choice is to pay off your balance. Be sure your card doesn’t charge a fee for not carrying a balance. If you decide to transfer the balance, be sure that it has completed the transfer process before you consider closing the old card. You may want to keep the old account open if it is one of your oldest accounts and you are trying to keep your credit score super-high, such as right before you buy a house.
I hope that this explains why the credit card issuers are changing the way that they calculate rates. Let me know if you have any other questions and I’ll find out the answers!