During the past years, I’ve heard more credit card horror stories than I care to remember. The Smart Balance Transfers blog is littered with disheartening stories of consumers who’ve had fixed rates changed to variable rates, interest rates doubled (or tripled) and minimum monthly payments increased by 200%. Many of these people were pushed to the brink of bankruptcy. Others are simply being fleeced. And now that Citi has decided to raise interest rates to 29.99% on tens of thousands of customers with good credit, I’m willing to resort to scare tactics to convince readers that there are 29.99 reasons to focus their efforts on paying off credit card debt as soon as possible.
If you have not received a Citibank 29.99% interest rate letter (you view the letter here), then for the time being you are in the clear. However, the Citibank rate increase – which takes effect anywhere from a few months to over a year from now, depending on the expiration of your card and your interpretation of the letter - may be providing some rather frightening insight into the future of credit card rates. And this insight provides 29.99 reasons to get out of credit card debt now.
Essentially, the new credit card legislationprevents banks from arbitrarily raising interest rates into the stratosphere as Citi has just done. However, it will not prevent credit card companies from offering you significantly higher interest rates when your credit card expires or when you go online to apply for a new one. This is a big loophole that may spell trouble for anyone with credit card debt. Here’s why:
Let’s say you currently have a variable rate credit card with a 14% interest rate. The variable part of this rate is tied to the Wall Street Journal Prime Rate, which is presently at a very low 3.25%. Should this rate increase to non-recessionary levels, it will likely jump to around 8%, bringing your interest rate up to 19%. However, the Prime Rate has been as high as 20% in the late seventies and early eighties and remained around 10% throughout most of the eighties. At those levels, variable interest rates might not only reach 29.99%, they may jump into the thirties. And this is for consumers with good credit paying the average interest rate.
Fortunately, a return to double digit prime rates isn’t likely in the very near term. However, if you check your credit card, the expiration date will likely fall within the next year or two. When that date arrives, your credit card company has every right to offer you the same 29.99% deal that Citi offered its customers this week, forcing you to either close your account or accept an extortionate interest rate. Given everything that has happened to credit card users this year, I think this type of tactic may become common very soon.
Citi is the first company to give its customers 29.9 reasons to get out of credit card debt; I doubt they will be the last. Consequently, the only way to safeguard oneself from these absurd rate hikes is to focus on repaying credit card debt as quickly as possible. As the name of this website implies, making smart use of 0% balance transfer credit cards is an extremely effective way to reduce monthly interest expenses and pay down credit card balances. Anyone who can get approved for one of these offers should strongly consider applying, as these offers may not be around much longer. The new credit card laws will provide consumers with some protection, but credit card companies will find ways to make money, and that money will ultimately come from your pocket so long as you are indebted to them.
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January 4th, 2010 at 12:10 am
This is the response I got from the Board of the Federal Reserve Bank when I complained about Credit Cards raising Interest rates.
From: CCS E-mail [mailto:FRB.Mail@frb.gov]
Sent: Friday, October 23, 2009 4:42 PM
To: ****rah ****nson
Subject: Response to your e-mail concerning: Board Members
Dear Ms. Johnson:
Thank you for your recent correspondence in which you expressed your concerns about the increase of your bank credit card interest rates.
As you know, the Federal Reserve finalized rules that are intended to enhance protections for consumers who use credit cards. The major provisions of the rules proposed in May 2008 under the Federal Reserve’s Regulation AA (Federal Trade Commission Act) may be accessed using this link: http://www.federalreserve.gov/newsevents/press/bcreg/highlightscredit20080502.htm These rules pertain to unfair or deceptive practices regarding credit cards.
The Board has strongly encouraged credit card issuers to comply with the final rules as soon as possible. For that reason, we share your concerns regarding the recent changes to credit card interest rates. However, based on the available information, it is unclear whether these changes are a response to the final rules or to increased losses caused by a combination of economic factors that negatively impact both consumers and lenders.We will continue to monitor this situation.
Because the final rules will fundamentally alter the way credit cards are underwritten and priced, we believe that issuers must be afforded sufficient time for implementation to allow for an orderly transition process that avoids unintended consequences, compliance difficulties, and potential liabilities. Previously, an issuer could set rates based on a consumer’s current risk of default, knowing that — if the risk subsequently increased — the rate could be adjusted accordingly. Since the final rules generally prohibit such increases with respect to existing balances, issuers will be required to account for risk in other ways, such as through improved upfront underwriting and more careful management of credit lines.
Although these new standards will impact consumers differently, we believe consumers will benefit overall from more transparent and predictable credit card pricing. We are concerned, however, that shortening the implementation period could cause issuers to overreact, leading to additional increases in costs or reductions in credit availability for a larger population of consumers than would occur if issuers have sufficient time to carefully consider how to adjust their pricing.
Again, thank you for writing. Please be assured that the Federal Reserve will continue to work diligently to find and implement the best and most sustainable solutions to the current economic challenges.
Sincerely,
JPD
Board Staff