Reform Prelude: Variable Rate Credit Cards Abound

Thumb.percentLed by Chase – the top issuer – credit card providers are converting more of their best-rated customers to variable interest rates, a policy category that is exempt from provisions in the upcoming  reform laws.
Avoiding the tougher rules on hiking fixed interest rates is one factor contributing to the trend. The other: variable rates, most often based on the prime rate, will mostly move upward in coming months, especially as the economy moves deeper into a sustainable recovery.
Earlier this year, Chase began converting credit card accounts from standard APR fixed rates to variable rates, based on the prime rate, with an added margin calculated by Chase.
The strategy for Chase and the other major credit card issuers helps retain best-rated customers. In many cases, the switch to a variable rate does not immediately affect the cardholder’s overall  interest rates. The modification amounts to a little-noticed “Change in Terms Notice” mailed before  year’s end.
“The principal factor we considered in amending your account is maintaining profitability on your  account,” reads the Chase notice on many accounts being switched to variable rates.
The prime rate, as reported by the Wall Street Journal’s bank survey, is at historic lows, and it is  the benchmark for credit card rates. The week that ended Dec. 2, the prime rate was at 3.25 percent.  It was at 4 percent a year ago.
The federal funds rate, which dictates borrowing costs for banks in the overnight lending market, also influences the prime rate. The federal funds rate is at .25 percent. It was at 1 percent a year  ago.
The Credit CARD Act 2009, the batch of reform laws set to take full effect Feb. 22, is squarely focused on fixed interest rates that are not tied to any index. The legislation’s “loophole” for  variable rate structures was emphasized by Sen. Carl Levin, D-Michigan, chairman of the Permanent  Subcommittee on Investigations, who joined major consumer groups last month in urging the Federal  Reserve to amend the reform that was signed by President Obama in May.
One of the tactics mentined by Levin is the “hybrid fixed-variable interest rate.” The hybrid  structure involves setting a variablel rate, but prevents rates from falling below a set minimum-rate buffer.
“The Subcommittee’s research confirms that such hybrid fixed-variable interest rates are proliferating. In my view, as one of the authors of the CARD Act, this type of interest rate does not and should not qualify under the exemption for variable interest rates,” Levin said.
Levin wants the Fed to exclude the hybrid-rate structure from the reform law’s variable rate exemption. The law’s restriction on arbitrary interest rate hikes and the required 45-day notice  ahead of interest rate increases would then apply to the hybrids, the senator said in his letter to  the Fed.
“Unfortunately…some credit card issuers have already initiated actions that seem designed to circumvent or undermine the CARD Act’s consumer protections…” Levin wrote. “As a result, the  proposed rule requires further clarification and strengthening to ensure effective implementation of  the consumer safeguards established by the CARD Act.”
See today’s Featured Credit Card Rates

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