The article below is written by Andrea Coombes. She makes some good observations about what is going on with credit card issuers today. The big players in the industry, including BofA are making the switch. Fixed rate accounts are vanishing! For consumers, this may be good news because many cardholders think that fixed rate actually means fixed. This is not correct, because insiders know that an issuer could change the rate whenever they chose.
The Merchant Maven
By Andrea Coombes
Credit-card issuers increasingly are moving consumers into variable-rate cards rather than fixed-rate ones, due in part to the new credit-card law slated to go into effect in phases starting in August.
Two major card issuers – JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) – recently switched some existing customers to variable-rate cards.
More than 90% of the offer letters card issuers mailed to consumers in recent months were for variable-rate cards, up from 60% in early 2008, while less than 10% were pitching fixed-rate cards, according to data from Mintel Comperemedia, a market-research firm based in Chicago.
“The fixed-rate-type cards are a dying breed,” said Curtis Arnold, founder of CardRatings.com, a consumer-information site.
Currently, about 66% of credit cards offered by the 50 major card issuers are variable-rate cards, according to Bankrate.com.
Card companies’ moves are partly because of the low interest-rate environment. When rates in general are expected to move higher, card issuers switch to variable-rate cards so they can catch the upside, passing those higher rates to their customers. Similarly, when rates are falling, card issuers are likelier to embrace fixed-rate cards that hold payments steady.
But the impending credit-card law is another reason behind the recent embrace of variable cards. The new law limits creditors’ ability to raise interest rates, but it can’t control changes in the prime rate – the index that’s the basis for most variable-rate cards. So even after the new law starts to limit rate increases, variable-rate cards will still change if and when the index they’re based on changes.
With the prime rate now at a low of 3.25%, it’s got just about nowhere to go but up. The prime rate is tied to the federal funds rate (the interest rate banks charge each other for loans), which is currently about 0.25%. Given the new law and the fact that interest rates are likely to rise in the future, “you’re taking a gamble, as an issuer, to have a fixed rate,” said Bill Hardekopf, chief executive of LowCards.com, a consumer-information site. For companies with variable-rate cards, even after the new law goes into effect, “you would be able to ride those increases, yet still maintain your margins.”
Still, some creditors have not made the move to switch existing customers. Hardekopf and others said there probably always will be at least some fixed-rate cards out there. “Even though there is a tremendous move now to variable-rate cards, I think there will still be a maverick credit-card issuer that offers a fixed-rate card to try and stand out and gain a competitive advantage,” Hardekopf added.
Not All That Fixed
The question is, how much does the shift to variable-rate cards really matter to consumers? In some ways, it might be good news, helping to steer people clear from the mistaken notion that “fixed rate” actually means fixed. The term as it relates to credit cards has always been something of a misnomer.
The rate is fixed “only until the issuer decides to change it,” said Greg McBride, senior financial analyst with Bankrate.com. Sure, the creditor must give consumers some notice to change the rate, but still, the rates could change. Of course, the new law, known as the Credit CARD Act, makes fixed-rate cards more appealing to consumers – and a lot less appealing to credit-card issuers.
Among other provisions, the new law will require 45 days’ notice, up from 15 now, to change a card’s interest rate, and it restricts increases on existing balances unless the customer pays 60 days late. (Again, the rate on a variable-rate card can change to the degree that the index upon which it is based moves higher or lower.)
Card issuers’ reaction to the law will bring major changes for consumers, McBride commented. “Consumers are going to have to get accustomed to lower credit limits and higher interest rates for years to come.”
Also, the new law states that “fixed rate” may only be used “to refer to an annual percentage rate or interest rate that will not change or vary for any reason over the period specified clearly and conspicuously in the terms of the account.”
For creditors, “they’re feeling this regulatory pressure,” said CardRatings’ Arnold. That’s causing more hesitation when it comes to advertising fixed rates.
Variable-rate cards have long outnumbered their fixed-rate brethren, McBride said. But fixed-rate cards could return if and when the prime rate hits new highs. “When interest rates are at a peak, the pendulum swings back the other way a little bit,” he noted.
Consumers have other things to worry about, according to McBride. “I don’t think people need to get hung up on fixed vs. variable as much as what are the rates you’re paying. … The takeaway for consumers is pay down your balance as aggressively as you can, because credit card rates are only going to go higher over the course of the next couple of years.”
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Contact for this article: Andrea Coombes, 415-439-6400; AskNewswires@dowjones.com
