With the Credit Reform Act on a February 2010 timeline, card issuers are looking for creative ways to paint a profitable bottom line. Increasingly, they’re turning to variable rate credit cards, which are tied to the U.S. prime rate. Why the shift, and what does it mean to card consumers?
A key part of the issue is that the new credit bill targets card issuers who attempt to raise interest rates. But language in the bill seems to only restrict card companies from hiking rates on fixed-rate credit cards – and not variable-rate credit cards.
That leaves credit card companies with a pretty big loophole. Now, card issuers are already notifying customers that their cards will be switched from a fixed-rate platform to a variable-rate one.
Up first for consideration is Discover Card (Stock Quote: DFS). In August, the card company served notice to two million customers that their fixed-rate cards could be shifted to variable-rate cards in the next few months.
The move only impacts a significant minority of Discover Card clients – according to the Nilson Report, an industry newsletter, it has 49.2 million credit card customers, through 2007.
But the impact for the unlucky two million could be substantial. Those customers face potentially higher interest rates if the economy improves and the Federal Reserve elects to raise interest rates. Higher rates also means higher payments, meaning that it could take Discover customers even longer to pay down their credit card debt. One piece of good news: The prime rate does not rise and fall in dramatic fashion. So it’s highly unlikely your card rate will jump from 12% to 30% overnight, even if you do accept the switch to a variable-rate product.