The steady rise in interest rates is teaching millions of consumers something about their credit cards they didn’t know. They-and you-are probably paying a variable rate on unpaid balances. As general rates rise, so does the cost of your credit-card debt.
“Many consumers who switched to lower-rate cards thought the rate was fixed,” says Robert McKinley, president of RAM Research, which surveys credit-card pricing. “Now, they’re going to see rates on some cards going back to the 18 percent to 19 percent range.”
Around 70 percent of all cards today-up from 35 percent just three years ago-charge variable rates, including those from the 10 largest issuers.
Take the popular get-something-back cards, such as those from General Motors, AT&T and General Electric. They offer cash rebates or points toward purchases or gifts when you use the card. The rates on unpaid balances typically float at 9.5 to 11 percentage points over the prime rate (the prime is the banks’ benchmark rate for loans).
Rates will go up
With the prime now at 7.75 percent, these credit cards will soon be charging 17.25 to 18.75 percent. And the rate rises may not be over.
Around half of these credit-card issuers adjust their interest rates every month. The other half do it quarterly. Your July bill may have been the first time you saw the effects of the interest-rate rise last spring.
Last week’s rate rise will appear in your bill no later than October. If the Federal Reserve adds yet another half point to rates, the costliest cards will exceed 19 percent.
The rate hikes alone may not make a noticeable dent in your wallet. The prime-rate increases so far this year will cost an extra $52.25 on a $3,000 balance. But the higher rates go, the bigger the difference between a high-rate and a low-rate card. If you switched from a card charging 18 percent to one that charges just 12 percent, you’d save $180 on a $3,000 balance.
“When consumers see a high interest rate at the bottom of their monthly statements, they’re going to move their cards,” McKinley predicts. “You could see another big rate war erupt.”
Consumers may also re-evaluate what they’re getting for their money, when they are paying high interest rates in return for small gifts and rebates. An 18 percent card that rebates 1 percent remains a bum deal, compared with a 12 percent card.
Some consumers “game” their rebate card. They use it to charge purchases (and get credit for gifts, rebates or airline miles), then they transfer any balances to lower-rate cards. Card issuers are countering this by offering rewards for carrying balances. Other terms of the reward programs could be changed in the years ahead.
For a list of low-rate and no-fee cards, send $5 to RAM Research, Box 1700 (College Estates), Frederick, Md. 21702. If you’re a tip-top credit risk, you can find a card charging under 10 percent with an annual fee in the $25 to $35 range (the bigger your credit balances, the less important the annual fee).
If you’re an average credit risk, you’re generally not eligible for the lowest-rate cards. But you could easily snag a card charging 12 to 15 percent, a few of which have no annual fee.
Another possibility: instead of switching to a new card, ask your current bank to lower your interest rate, or waive your annual fee, or both. You have a lot of leverage if you pay on time, charge at least $3,000 a year and carry a balance of at least $2,000.
For a low-rate nationally issued Visa or MasterCard, try Wachovia Bank in Georgia (800-842-3262). It charges the prime rate the first year, adjusted monthly; in subsequent years, it’s prime plus 3.9 percent. If the new prime stays level, you’ll pay 7.75 percent starting Sept. 15 and 11.65 percent in later years. Annual fee: $18. The Amalgamated Trust Bank in Illinois (800-365-6464) currently charges 13.25 percent with no annual fee; that goes to 13.75 percent on Oct. 15.
The lowest fixed-rate card on RAM’s list comes from People’s Bank in Connecticut (800-423-3273): an attractive 11.5 percent with a $25 annual fee. The bank’s Ronald T. Urquhart says the bank has no plans to raise the rate on the new cards it issues.
But before turning to a national issuer, look around your own community. Local banks and many credit unions offer credit cards, some at single-digit rates. According to McKinley’s surveys, they average 2 to 3 percentage points less than the national issuers charge.
