Can they raise rates on a fixed credit card?

[midnight]

I have a fixed credit card rate at 11% and I received a notice in the mail that they are raising the rate to 13%. Since it isn't a variable credit card, are they allowed to raise the interest rate? What does the fixed rate mean if they can change the interest rate whenever they want?

[MrsChambers]

oh yes, indeed. they can pretty much do whatever they want, whenever they want.

you should read the terms that came with the card.

perhaps it was only a fixed rate for a fixed time?
have you been late with that payment? perhaps that is why they raised it?
have you been late with any other payments? perhaps that is why they raised it?
has your FICO lost some points? that could be a reason for the increase.

OR

they may have just wanted to increase it. but to answer you question.. yes, they certainly can raise your rates like that.... indeed

[jhd815]

In essence your card is still at a fixed rate, 13%.

If you had a variable rate, the rate could change every statement period based on the formula using the PrimeRate + whatever your cc company would add to the PR.

Here's what's happening behind the scenes: CC companies are having to raise rates on fixed rate cards/accounts because the Fed has increased the amount that the banks charge each other for overnight loans. When you make a credit card purchase, you are basically using a loan from your credit card company to make your purchase. Since banks are having to pay more for loans between each other, they are making less profit and they don't like that one bit. So cc companies are either raising fixed rates or in many cases, transfering account holders from fixed rates to variable rate cards in order to continue to make their profits.

About 3 months ago one of my cc companies changed my account from fixed 9.99% to variable rate which rose by 3% in the last three months. I called my cc company to ask them about the rising interest rate and, to make a long story shorter, I was able to have my cc account switched back to a fixed rate at 9.99%.

[terry1156]

The cc companies like to use the word "fixed" but it has little meaning. As long as they give you notice a week before, they can change the rate at any time for any reason.

[Tree0164]

With the fed raisiing interest rates watch out for these notices that will sneak through in the mail.

[singinjeannie]

Originally Posted by Tree0164

With the fed raisiing interest rates watch out for these notices that will sneak through in the mail.

I hadn't heard they were raising the rates again. Are they raising again???

-Jean

[34saving]

Yep. Another 1/4 point last Thursday . . .corresponding stock market "dip" too I think primes is at 6.25% now, but I could be wrong about that . . .

[singinjeannie]

Can anyone tell me why they do that? I mean, we're still recovering from a recession, so why mess with success? Why do they desire to slow down the economic growth?

-Jean

[CRFSaver]

The Federal Reserve has a mandate to balance out unemployment and inflation. So at the moment while the economy is chugging along (while not at 90's levels), they are more concerned with the inflation component. Monotary policy is historically at a faily accomidative stance. Even with the most recent rise rates were higher in 1998. In fact expect more increases as the FOMC has maintained its measured approach.

There were a couple posts in a previous thread that explains the reason credit card companies change their rates. I can't remember where I got it form but remember hearing that as long as companies maintain their rates (for those in good standing) for 3 years they can call it fixed. Of course take that with a grain of salt.

Here is a copy of the two posts from a previous thread:

Post 1
The credit card companies still benefit even if you pay off your balances at the end of the month. The interchange that gets charged is where they make it. In fact the CC industry is moving towards transacters versus revolvers in the long run. And Visa and Mastercard are even raising the interchange rate charged to merchants for their "Signature" cards. Some (not all) of the CC companies are starting to make changes to the way they do business by limiting fees and maintaining fixed rates longer. There are still many that do sleezy business though which is unfortunate.

Part of the reason CC companies change rates is that they are not like a traditional fixed rate loan (Mortgage or Auto) which has a defined maturity date and amortization schedule. As funding costs change (remember banks are levered vehicles), rates on the cards need to go up to reflect it. I am not a fan of the Universal Default that many companies use but that is slowly going away. If anyone has an installment loan watch out as some companies are changing the rates on those also.

Kohl's private label card is owned and run by Kohls so no credit card company is benefitting from it. Kohl's benefits because you now have made a conscious decision to shop at their store versus a Mervyns or other competitors.

Post 2
There is a reason rates are set at 18 or 19 percent. So an average funding cost of 3-4%, net charges offs of between 4-7% means the credit card companies cost is between 7% and 11%. (People forget that the CC take losses on those loans of between 4.5 to 8.5%.) So if they charge 18%, they are making between 7-11% on those balances. That doesnt include the capital a bank has to hold off to the side that the OCC or Fed require.

Credit cards as an asset class are quite a bit riskier then a mortgage as there is no collateral backing the loan being made. Because it is riskier they are going to charge more. Just like a sub prime borrower pays more then a prime or super prime borrower. Dont get me wrong, they still make great money. But it is not like they are making 15% on those 18% rates.

A revolver is someone who maintains a balance, or what is refered to as a revolving balance. A transactor is someone who uses the card to make purchases, and then pays the balances off. CC companies still make money off of transactors due to the interchange and discount that merchants pay.

In fact to pay for some of these reward programs for consumers, Visa and MasterCard are classifying many of the rewards credit cards as "Signature Cards", with a higher interchange. That is why so many places dont take American Express due to the much higher interchange.

You look at a company like Wells Fargo that has dirt cheap funding (they are rated AAA)definately has an advantage over an MBNA or Capital One (both BBB) or even a Metris (BB), when it comes to funding costs.

Hope this helps explain some of these things.

[dealsaver]

Two words. Universal Default.

[CRFSaver]

Not all companies do Universal Default. I know mine doesnt and it actually shocks people that they dont. The nature of credit cards is that they are a revolving balance. Theoretically it could never be paid down over the next 30, 40 or 50 years which in this day and age would not be totally out of wach.

It is on your revolving balances that banks will change your rate, i.e credit cards. You don't see rate changes on an auto loan as it is not a revolving balance but an amortizing one. Same thing with a mortgage. What I have heard is citi is starting to apply universal default to installment loans which is might shady.