The Associated Press is reporting that banks will soon start employing variable interest rate strategies on most credit cards. This means that the days of the fixed rate card are numbered.
It should come as no surprise to you, our loyal readers, that is in response to the federal government's crackdown on sudden interest rate hikes, vague terminology relative to fees and an industry-wide, consumer-unfriendly marketing approach. The new laws, which will take affect next year, are part of a sweeping legislative effort to help stabilize Americans' increasing debt load.
The two largest issuers of credit cards in the country, Chase and Bank of America, are on the record stating that most fixed-rate cards will be switching to variable in August. Discover Card has already enacted some of the changes. It will not take long for the rest of the industry to follow in lockstep.
While industry representatives see the step as a helpful one for cardholders, most consumer-advocates are leery. A variable rate may at times offer a lower interest incentive to card users but there is little doubt that an increase will catch many cardholders off guard.
By all means, it is critical for an individual to self-govern in terms of card usage. However, the industry has come under fire for employing complex tactics that require consumers to monitor countless agreement terms every month. A variable rate, which will be based on the fluctuations of the prime rate, simply means there is one more plate in need of spinning. And with more than 230 million card holders between Chase and Bank of America, a lot of porcelain is bound to be broken.
The banks are stating that the variable rate strategy will help them off-set the growing cost of issuing credit. Traditionally, fixed rate cards were reserved for the best customers. However, they rarely remain fixed, as banks adjust them suddenly if they feel a user becomes a higher risk. As it turns out, this happened to hundreds of thousands of customers as the recession stole jobs and cut income. Therefore, the credit card companies bumped rates endlessly, driving people into debt and contributing to the nation's number of bankruptcy filings.
Now, fixed rate cards are going to be quite rare and banks will have to actually use good judgment when issuing such a credit card to a customer. One bank official in Charlotte, on behalf of Bank of America, said that the new legislation will "... limit our ability to re-price based on risk."
Isn't that the point?
The current low prime rate is also contributing to the banks' decision because they believe a variable rate attracts more users of credit. There are certainly plenty of arguments about the critical nature of new credit in business lending but the consumer banking world should exercise extreme caution if trying to use credit as a means to stimulate spending. We're simply no where near even the edge of the recession woods yet.
Of course, that's never stopped the credit card industry before.
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