Why Your Credit-Card Rate Might Not Be Falling

The prime rate looks set to keep falling following the Federal Reserve's latest rate cut. Since the consumer credit-card rates are in part measured by the prime rate, consumers might expect to see their rates fall as well.

But a number of common catches can keep your credit-card rate from falling with the prime rate.

Your credit card may have a "rate floor" that prevents your rate from falling below a certain level, your credit score may have changed causing your rate to skyrocket or your creditor may raise rates because of economic conditions.

About 90% of credit cards are variable rate, according to Curtis Arnold, founder of CardRatings.com. And most of these are tied to the prime rate as published in The Wall Street Journal plus a predetermined premium: a rate which has fallen three full percentage points since the Fed started slashing rates in September.

A rate floor is the minimum interest rate you'll pay, regardless of the prime rate. Say your rate floor is 10% and your premium above prime is 5%. If prime is 8% you'll be paying 13% interest. But if prime falls four percentage points, your rate will only fall three percentage points.

After you hit the floor, your rate stops falling.

So how do you find out if you have a rate floor before you hit it?

It's not always easy. Rate floors may not always be disclosed in credit card contracts, says Linda Sherry, Director of National Priorities at Consumer-Action.

But if your contract says the rate can fall "no lower than X%" then you're in luck: You're bank disclosed its rate floor.

If not -- or if you've lost the contract your bank sent you -- you can always try and call your bank and ask. Of course, you'll have to navigate an often unwieldy automated answering system and bank on the front-line representative giving you the correct information.

Another catch -- which, of late, has been a lightening rod for Congressional ire -- is creditors' practice of raising cardholders' interest rates, even when they haven't made a late payment. Some creditors use credit scores to assess consumer risk. If your credit score falls, which could happen if you pay another bill late, if you take out additional credit lines or if your total debt comes closer to your credit limit, your interest rate can skyrocket.

After Congressional interest peaked, some creditors, including Citigroup'sC Citi Cards and JPMorgan ChaseJPM, say they abandoned the practice. But other creditors continue to use credit scores in conjunction with other factors when determining your interest rate.

Some credit card contracts also reserve the right to use general economic conditions to increase interest rates. The Los Angeles Times reported last month that at least two major credit cards added language in the last year saying that cardholders' rates may rise due to "market conditions," a term that seems to be replacing a clause that allowed cardholders' rates to be jacked up "at any time for any reason."