Credit Card Surprise
The Dollar Stretcher
by Gary Foreman
gary@stretcher.com
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
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.
Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website:
www.stretcher.com
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