Cardholders Can't Catch a Break

SmartMoney

Just because the Federal Reserve decides to cut rates, doesn't mean your credit-card issuer will follow suit.

In fact, since the Fed started slashing rates in September 2007 with the hope of reigniting the economy, credit-card rates have barely budged. Excluding the latest 50-basis-point rate cut (we'll explain why later), the federal funds rate is down 3.25%. The prime rate, which most credit cards base their interest rates on, slid down by the same amount. Nevertheless, the average rate for credit cards is down a meager 1.32% to 13.75%, according to Curtis Arnold, founder of Cardratings.com. "Consumers didn't get anywhere near the relief they should," he says.

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Sufficient data about credit-card rates since the Fed's rate cut two weeks ago isn't available yet. But any decrease is expected to be negligible at best. (Based on the information that's come in so far, rates are actually up marginally, averaging 13.77%). What gives? Banks are looking for any way possible to offset losses in other parts of their business. "In many cases, the credit-card business is still profitable, but over there in the mortgage business it's hurting, and the companies are looking for ways to make up that money," says Daniel Ray, editor in chief of Creditcards.com. So even though the prime rate now sits at just 4.5%, rates on cards linger in the double-digits.

Of course, this makes no difference to those who hold fixed-rate cards (43% of all cards). But those holding the 57% of cards that carry variable rates should be ticked off. Theoretically, rates on their cards should be down significantly in the last year. But thanks to something called a rate floor -- the lowest level a credit-card issuer will allow rates to go -- many cardholders will never reap the benefits of the Fed's steep rate cuts, says Cardratings.com's Arnold.

Another trick of the credit-card trade: As interest rates fall, banks start converting variable-rate cards into fixed-rate ones, says Arnold. That way, they don't have to worry about offering cardholders a lower rate. Such an action is completely legal as long the card issuer provides the consumer with 15 days notice.

If all this wasn't bad enough, issuers are also slapping consumers with higher interest rates for virtually any reason. Within the industry, this is known as adjusting for risk. But to consumers, it's unjust punishment.

Rising Rates

Typically, credit-card issuers bump up a card's interest rates if the holder is deemed a higher credit risk. Now, thanks to the credit crunch, plenty of people are falling into that category.

Not only are lenders' standards much loftier -- they reserve their best rates for borrowers with a credit score of 730 and above these days -- but they are also taking actions that make it easier for cardholders to fall from credit-score grace. For example, many credit-card issuers are decreasing credit lines, making it easier for consumers to either max out their card or get painfully close to their limits. As a result, their credit utilization ratio -- or the amount of credit they owe vs. their total available credit -- goes up. The higher a credit utilization ratio goes, the more it weighs down a consumer's credit score.

Finally, banks are getting more aggressive about hitting consumers with the dreaded default rate, which now averages a mind-blowing 29%. Now, if a customer has just one negligent payment, they'll get slapped with this higher rate, according to a survey by consumer advocacy group Consumer Action. (It used to take two or more late payments before an issuer would do so.)

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How to Lower Your Rate

Complain. Consumers with a solid payment history that are getting hit with an exorbitant rate should call their credit-card issuers and ask them to lower their interest rate. If the issuer refuses, threaten to switch to another card. Despite the tight credit market, credit-card companies don't want to lose customers -- on average it costs $200 in marketing expenses to attract a new cardholder, says Arnold.

Look for a new card. Someone with good credit (a credit score above 730) should be able to find a card with an interest rate just above 9%, says Arnold. (Consumers can compare offers on Cardratings.com.) Also, shop around for offers from credit unions. No matter what your credit score is, the rates on these cards can never exceed 18%, says Fred Becker, president of the National Association of Federation of Credit Unions.

Opt out. Consumers that are notified by mail that their interest rate is jumping higher have a window of time in which they can opt out of the rate increase. The only caveat is that the customer can't make any new purchases with that card.

Ask for an account review. OK, so you've had a misstep, but you're back on track. It's time to ask for forgiveness. Some issuers, including Chase and American Express, are willing to lower a consumer's interest rate after six to 12 months of on-time payments, even after it's been slapped with the default rate, says Consumer Action.

Here are some of the credit cards that are charging customers the highest rates*:

The Biggest Offenders

Card Issuer
Interest Rate
GM Flexible Earnings 14.99 - 23.99%
Wells Fargo Bank Home Rebate Card 11.65 - 22.25%
US Bank Visa Platinum Credit Card 8.99 - 21.99%
Steuben Trust Cash Rewards Visa Platinum 8.99 - 21.99%
Evans National Bank Cash Rewards Visa Platinum Card 8.99 - 21.99%

* These cards charge a range of interest rates based on a consumer's credit risk. These are not default rates.
Source: Cardratings.com

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