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The Wall Street Journal
As More Rates Go Variable,
It's Easy to Get 'Bumped Up';
There Are Ways to Fight Back
By JANE J. KIM
March 25, 2006; Page B1
With interest rates rising, it's getting tougher to decipher the murky world
of credit-card terms.
For years, credit-card companies have been luring clients with offers to
lock in low fixed rates. Message: For people who carry a balance on their
card -- and the vast majority of cardholders do -- there's no need to worry
that the interest rate will rise without any warning.
But as the Federal Reserve continues to raise short-term rates, credit-card
issuers have been rushing to convert their cards to variable interest rates
instead. That makes it easier for them to quietly bump up the rates they
charge at any time, without notifying cardholders. By contrast, fixed-rate
cards typically must first mail out a notice to clients announcing any rate
changes.
Today, roughly two-thirds of all credit cards carry variable interest rates,
a level that hadn't been reached since the 1990s. Just a year ago, about 55%
of all cards had variable rates, according to Bankrate.com. For example,
just last month, American Express Co. told financial analysts that 57% of
its cards had variable rates at the end of December, up from 38% in 2003.
"In order to be able to continue to provide value to our customer, sometimes
we need to raise fees and adjust pricing," an AmEx spokeswoman says.
For cardholders dissatisfied with their new terms, there is an alternative,
although it requires some shopping around. Many card issuers are now
significantly sweetening their introductory promotional offers in an effort
to persuade people to switch cards.
In some cases, cards now offer 0% teaser rates good for a year or longer.
For instance, AmEx and J.P. Morgan Chase & Co. are offering 0% rates on
balances for up to 15 months and 12 months, respectively. By contrast, in
the first quarter of 2005, many card issuers offered introductory rates
ranging from 3% to 5.99% for a period of six to eight months, says Jenny
Roock, research manager of Mintel International Group Ltd.'s Mintel
Comperemedia unit, a direct-mail monitoring service.
The shift to variable rates is part of a dance that credit-card issuers have
danced for years. When overall interest rates are falling, more companies
shift to fixed-rate cards, which results in lower rates being passed along
to consumers more slowly. When rates are rising, companies prefer
variable-rate cards, which let them more quickly raise the rates they charge
consumers. This helps bolster profit margins on credit-card loans at a time
when the companies' cost of funds is increasing.
Indeed, interest rates are climbing faster right now on variable-rate cards
than fixed-rate options. Last month the average interest rate on
variable-rate cards climbed to 15.75% from 12.84% in the year-earlier
period, according to CardData, a unit of consulting group CardWeb.com. This
has far outpaced the average increase in fixed-rate cards to 14.11% from
13.25% in the same period.
It's bad news for anyone who carries an unpaid balance on their credit card,
because a few ticks on a card's rate can add up quickly. Almost two-thirds
of all cardholders carry a balance and pay finance charges each month. As of
the end of last year, Americans carried a total of $838 billion in unpaid
balances, or an average $4,956 of debt per cardholder, according to Nilson
Report, a trade publication.
There are still a few fixed-rate cards that aren't trying to raise rates on
current users. But newcomers don't get quite as good a deal. Capital One
Financial Corp. continues to offer a fixed rate of 5.90% to existing
customers who hold its Capital One Platinum Prestige card. However, the bank
recently changed the terms on this card for new customers, shifting to a
variable rate that currently stands at 7.07%.
Similarly, Pulaski Bank & Trust Co. in Little Rock, Ark., has also held on
to its fixed-rate card, although it raised the rate recently for new
customers to 7.99% from 6.99%. Existing customers still pay the lower rate.
A Pulaski spokesman says that since the bank, which offers both Visa and
MasterCard cards, is a niche player, it wants to hold on to its customer
base. Capital One Financial says that its pricing strategy is influenced by
"market conditions" and that while it "began leaning a little more to the
variable side" last year, it still offers fixed-rate products.
Wells Fargo & Co. started shifting the majority of its cards to variable
rates starting in 2002, although it still offers a few fixed-rate options, a
company spokeswoman says. Web sites such as Bankrate.com1 and Cardweb.com2
provide information about card issuers offering low rates.
American Express, like most other banks, has for months been shifting its
standard card charges to variable rates. More recently, however, the company
changed its "default" rates -- which are rates that often replace a
customer's standard rate if they miss or are late with payments -- on some
cards to a variable rate of prime plus 12.99 percentage points, currently
20.49%. Previously, American Express had a default rate that was fixed at
17.99%.
Default rates have generally moved higher along with the industry shift to
variable rates. Among other major issuers, including J.P. Morgan Chase,
Citigroup Inc.'s Citibank and Bank of America Corp., some default rates are
currently above 30%. That represents a slight increase of roughly a
percentage point from a year earlier.
Consumers who transfer balances should watch out for balance-transfer fees.
Banks will often waive balance-transfer fees -- typically 3% of the balance
up to a maximum of $75 -- for a set period. But some banks are starting to
eliminate that cap, which means that a person transferring $5,000 to another
credit card may end up paying $150 for that privilege, says Greg McBride, a
senior financial analyst at Bankrate.com.
Also, many of the best rates are available only to people with a stellar
credit history. In the past, someone with a credit score of 700 or 725 might
have qualified for the best rate; today, customers typically need a score
above 750 to get the best rate available, he says.
If a bank changes a card to variable from fixed (or if they raise a fixed
rate) they usually let customers opt out of the new terms and let them pay
off their balances at their current rate, if they also agree to stop using
the card. With fixed-rate cards, an issuer can typically change that rate at
any time -- or change the card to a variable-rate structure -- with as
little as 15 days notice.
Rate changes on variable-rate credit cards take place automatically, based
on a built-in formula that is often tied to a bank's prime rate. Issuers
usually don't send out notices when those adjustments are made. Therefore,
the easiest way to track whether a rate has changed is to pay attention to
the monthly billing statement.
But some analysts say fierce competition for new customers is likely to keep
a lid on how high credit-card interest rates can go. As more people turn to
mortgages and home-equity loans instead of credit cards, credit-card
companies can't raise rates too quickly, otherwise they will lose customers,
says analyst Ken Posner of Morgan Stanley. The dollar amount that people are
borrowing on their cards is growing at 2% a year, compared with double-digit
growth during the mid-1990s, he notes.
Write to Jane J. Kim at jane.kim@wsj.com3