July 10, 2009
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News: Banks Jumping on Variable Rates
We've heard all about the new credit card reform bill and the sweeping changes that are expected to occur over the next six months. There has been a lot of noise about how banks are changing from a fixed credit card interest rate to a variable rate. During the past few months, JPMorgan Chase, Discover, and Bank of America Corp. (BoA) have all notified some of their customers that their credit card interest will be switching from a fixed rate to a variable rate. Banks are trying to get a jump on the new law that will limit their ability to increase interest rates. By converting to a variable rate and tying it to an underlying interest rate (prime), banks will have the ability to adjust interest rates as prime goes up and down. If you're like me, you don't have a clear understanding on the differences between two rates.
Fixed interest rates remain constant for a set time period regardless of any other conditions or any change in prime. The advantage is there are no surprises and the credit cardholder knows how much his next payment will be and can calculate how long it will take to pay the debt off. The disadvantage is that if prime goes down, the payment never changes and the borrower continues to pay an interest rate higher than prime. On the other hand, a variable interest rate adjusts up and down as prime goes up and down. The advantage is; if prime goes down, you pay less in interest. However, if prime goes up and there is no cap, you pay more interest. Also, credit card companies are required to notify customers with fixed rates 45 days in advance of any change, whereas, no notification is necessary with a variable rate.
Chase customers have been given the option to opt out of the change; however, if they choose to, they must close their credit card accounts. Other banks are not allowing customers to opt out of the change, therefore, if they are carrying a balance forward the rate will change regardless if they close the account or not. Overall the change doesn't seem to be too awful for most consumers; however, for some who are privy to those great low interest rates, they could see their payment minimum increase.