Credit Cards: Goodbye, Fixed Rates?
By Candice Choi, Associated Press It could be time to kiss fixed-rate
Two of the biggest issuers in the nation— ( (BAC)) and ( (JPM))—say they're switching some fixed-rate cards to variable rates to manage costs in light of the sweeping new reforms to the credit-card industry. The interest on variable-rate cards is tied to the rise and fall of the prime rate.
The changes will be effective starting in August for both banks. The moves are just the latest clampdown on cardholders over the past year. To prepare for a new law that will limit banks' ability to change card terms, lenders have been raising interest rates, tightening credit limits, and even closing inactive accounts.
Specifics Not Available Now, banks say the switch to variable rates will further limit their risk under the new credit-card law, which becomes effective in February. "Variable rates reflect Chase's changing costs for funding credit-card loans. As a result, our customers may benefit from lower rates when the costs to Chase are decreased, or may experience higher rates as costs increase," the bank said in a statement.
Chase and Bank of America wouldn't give specifics on how many accounts the change will affect, but said they will continue to offer some fixed-rate cards. Chase has 159 million credit cards in the U.S. and Canada, while Bank of America has 70 million worldwide.
Variable-rate cards currently make up 66% of credit cards issued by the nation's largest lenders, according to Bankrate.com ( (RATE)). Fixed-rate cards are generally reserved for the best customers. But despite the name, the terms on fixed-rate cards could always be changed in the past. That allowed banks to make the gamble of offering customers favorable fixed rates—then raising rates if the customers later proved too risky, said Leigh Allen, CEO of Global Consumer Finance Advisory, a consulting firm based in New York.
Working in Lenders' Favor Now that lenders will have limited ability to change card agreement terms, Allen said they will have to exercise a lot more caution in issuing fixed-rate cards. "They have to be very careful about who they give these (fixed) rates to," Allen said.
That's clearly the case for Chase. In determining which fixed-rate cards to change, spokeswoman Stephanie Jacobson said the company reviewed accounts for potential risk, usage, and balance histories. Betty Riess, a spokeswoman for North Carolina-based Bank of America, also noted that the new credit-card legislation will "limit our ability to reprice based on risk."
There's another reason variable-rate cards work in lenders' favor. Banks can set a "floor" in the fine print of a card agreement, meaning the customer's interest rate won't fall below a certain level regardless of how much the prime rate drops.
Anticipating a Rising Prime For instance, if a card's rate is based on the prime rate plus 5% with a floor of 10%, the rate on the card wouldn't drop below 10% even if the prime rate fell below 5%. The current prime rate is around 3.25%.
Jacobson would not comment on Chase's policy on floors; Bank of America said it does not have floors on variable-rate cards.
New credit-card reforms may not be the only reason banks are migrating to variable rates, said Greg McBride, a senior analyst at Bankrate.com. Card issuers typically start favoring variable-rate cards when the prime rate is at low levels, McBride said. This lets them benefit as the prime rate inevitably climbs back up.
But banks' preferences may not swing back toward fixed-rate cards even as the prime rate rises—at least not as much— given the new rules limiting lenders' ability to raise rates on a whim.