Dollar Stretcher
(featured
column)
Credit Card Surprise
by Gary
Foreman
Q - My husband and I were holders of a Visa Platinum card with a fixed 5.9%
interest rate. Our account was recently sold to another credit card
company and we have been informed that our rate is now variable meaning we could
be paying as much as 18% and that includes our balance transfer which were
purchases made with the understanding it was at the lower interest rate.
Is this legal? I am currently shopping around for another card with a
comparable interest rate.
Anne
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A- Sounds like Anne feels betrayed by Visa. And, that's understandable. She
thought that she had agreed to a specific interest rate for the life of the
account. But that wasn't really the case.
There are surprising differences in credit card accounts. And most of us aren't
aware of them. So let's take a look at fixed and variable rate credit cards.
Unfortunately for Anne the new card issuer can change her rate. It's perfectly
legal. In fact even her old credit card issuer had the right to change the rate.
It just happened that they never did.
A fixed-rate account is really mis-named. It's not like your mortgage or an auto
loan where you can expect to pay the same rate for the life of the loan.
The Truth In Lending act only requires that card issuers give you 15 days notice
if they're going to change the rate on a 'fixed-rate' account. Some states have
laws that require a longer notice. But you're still vulnerable to rate changes.
A more accurate title would be that they're an 'almost fixed-rate account'.
Her new card issuer has given Anne a variable-rate account. And, as you might
expect, the rate fluctuates.
Variable-rate accounts are tied to a published index. Most use the federal
funds, Federal Reserve discount rate or the one, three or 6 month Treasury Bill
rate.
The index is used to calculate the interest rate charged the consumer. You will
be charged a rate that's higher than the index. Dig through the fine print to
find the formula.
Expect a variable-account rate to change fairly often. The rate might not be
significantly different, but it can change each month.
The card issuer must tell you when you open the account how the rate will be
determined. Unfortunately, it's not going to be highlighted for you. In most
cases, the card issuer would be happy if you never read the disclosure
statement.
If the truth were told, most of us don't really like to read those statements,
either. But you need to know the minimum and maximum rates that can be charged
on a variable-rate account. Remember that a high minimum rate means that you
don't benefit if general interest rates drop below a certain point.
Those aren't the only circumstances that could cause Anne's rate to change. Both
fixed and variable rates can change if she's late with a payment. And all her
accounts could change. Not just the one that was late.
Some cards will also allow a higher rate to be applied if Anne goes over her
credit limit. A 'credit limit' isn't really a ceiling on how much you can
borrow. Many accounts will let you charge beyond your limit and then assess
'over limit fees' and a higher rate of interest.
What can Anne do? She's already pursuing one option. That's to transfer the
balance to a new fixed-rate account. Of course that's no guarantee that the rate
won't change later. And some fixed rate cards charge higher rates than variable
ones.
If she has the money, she can pay off the balance and notify the card issuer to
close the account. A final alternative would be to use another account for new
charges and pay off the Visa account as soon as possible.
The bottom line is that what Visa did might have been misleading, but it was
legal. And, we can all learn from Anne's experience. Whether you have a fixed or
variable account, don't count on your interest rate staying the same. There are
no guarantees that will happen.
* * *
Copyright 2002 by Gary Foreman
