Since the passage of the Credit Card Act of 2009, consumers have watched as credit card issuers have raised rates, reduced rewards, and limited credit. Designed to protect consumers from predatory lending practices in the credit card industry, the Credit Card Act of 2009 has instead done just what many predicted–made credit cards less consumer friendly.
The first casualties were higher interest rates and reduced 0% balance transfer offers. Higher fees on balance transfer offers and increased annual fees followed. And now, fixed rate credit cards have become the latest casualty of the Credit Card Act.
Before the passage of the Credit Card Act of 2009, fixed rate credit cards were common. As the name suggests, a fixed rate card has a set interest rate that does not fluctuate as interest rates go up and down. Before the Act, card issuers could raise a fixed rate card, however, if it concluded the cardholder presented an increased risk of default.
Because the Credit Card Act severely restricts a card issuer’s ability to raise rates, card issuers have been moving away from fixed rate cards and to variable rate cards. With variable rate cards, the interest rate is tied to the prime rate or some other interest rate measures. As interest rates in general go up, so will the rate on the credit card.
Many national card issuers have gone to variable interest rates, including the following:
While some have described the switch as taking advantage of a loophole in the Credit Card Act, that overstates the case. A variable rate card will not permit card issuers under the new law to raise rates at will. The card’s interest rate will still need to be tied to the prime rate or some other benchmark. Indeed, this will benefit consumers as rates fall. Given the historically low prevailing rates, however, we are unlikely to see rates fall dramatically if at all in the near term.