A silver lining: Credit cards buffered from rate hikes

August 9, 2011

Credit cards are pictured in a wallet in Washington, February 21, 2010. REUTERS/Stelios VariasWith the downward plunge of the stock markets and the potential for interest-rate hikes following the downgrade of U.S. debt, consumers are understandably worried about their own interest-rates going up. But one bit of good news in all this volatility is that credit cards are somewhat insulated, for right now.

That’s “somewhat” because the protections are for what you’ve already spent and not what you’re going to spend going forward.

Banks have moved most credit card holders to variable interest rates, so it would seem the impact of any rate hike would be devastating and immediate. But “consumers have new protections against sudden rate hikes, thanks to the credit card reform law,” says Dan Ray, editor-in-chief of CreditCards.com. The good news is that consumers have some time to plan ahead in case rates do jump.

First of all, any rate hikes that would happen would not affect existing balances, only new charges, thanks to the changes in 2009. (TransUnion, the credit reporting giant, says the average credit card balance in the U.S. is about $4,700.)

Secondly, there will be some lag in rates for consumers going up because rate hikes are tied to the prime rate, which is driven by the Federal Reserve, not the markets. But there is some bad news, too, because banks have pushed their customer to variable rates, and that means that any rate hike that does kick in will hit right away for new charges. Banks can also increase the margin of how much above the prime rate they will charge you, as long as they give you 45 days warning.

So, if your finances can’t handle a rate increase, the prevailing advice from credit experts like Bill Hardekopf, founder of LowCards.com, is to stop spending so you’ll know that your existing balance is locked in at the current rate.

Ray from CreditCards.com says, “It’s important to assess and plan. If you’re carrying a large amount of card debt, use a credit card calculator and play some what-if scenarios. Could you afford the payments if rates jumped, say, 5 percentage points?”

He recommends that for those with good credit, this is a great time to shop around for a new card since many banks are once again offering zero percent introductory rates that typically last for about a year.

“For people with good credit, offers have actually become more generous in recent months,” Ray says.

For those whose credit isn’t great, he says they must commit to making at least their monthly minimum payments of every card or risk the steep penalty rates imposed if a payment is 60 days or more late.

Even missing by less than that can have a big impact.

“A single skipped payment can knock 110 points off your FICO credit scores, so it’s obviously something to avoid if you possibly can,” says personal finance expert Liz Weston.

Falling behind on these payments is often the route to bankruptcy, which can have a long-lasting negative impact on your future ability to borrow.

“If you can raise money somehow, by trimming expenses and selling unneeded items or getting a second job, that is usually the best way to go,” Weston says. “What you don’t want to do is raid your retirement funds to pay bills. That money is protected from creditors and shouldn’t be tapped.”

If an interest-rate hike comes and then pushes you deeper under water, Weston suggests quickly reaching out to the credit card companies to try to work out a plan.

“Some have programs for people in distress that waive or reduce payments for short periods,” she said. “The problem is that most people don’t ask for help until they’ve dug too big a hole, and by then the only realistic solution is bankruptcy.”

3 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Yeah, but credit cards have extremely high interest rates — at a near-space level of altitude compared to Treasury bonds. And borrowers are borrowing from banks rather than from the U.S. Government. So the connections between the credit card market and the U.S. Treasury bond market are attenuated.

Posted by Bob9999 | Report as abusive

…And if we stop spending we just increase the chances of more job losses which creates additional decreases in spending creating a downward spiral of doom and gloom and depression of a magnitude never seen before on a planet of almost 7M people. Why do banks and credit card companies have to make double digit interest when the entire globe is in a deep financial downward spiral? Cannot they not at least pledge to keep interest rates in the single digit range for 5-7 years until we can come out of the spiral? What is wrong with these financial leaders? Does greed cause insanity or does insanity cause greed?

Posted by JLWR | Report as abusive

there is a story which tells how govt with banks and rich people making fool of us ……..capitalism

One day a tourist comes to the only hotel in a debt ridden town. He lays a $100 note on the table and goes to inspct the rooms. The hotel owner takes the note and pays his debt to the butcher. Butcher pays the pig farmer. Pig farmer pays the feed supplier. Supplier pays the prostitute. The hooker pays off debt to the hotel owner for the rooms she rented for her clients. Hotel owner then lays the note back on the counter. The tourist picks it up and leaves as he he did not like the rooms. No one earned anything. But the town is now without debt & looks to the future with a lot of optimism. And that is how the world is doing business today!

Posted by kuldeepo | Report as abusive

[…] a certain mystery about applying for a credit card: Is your credit score good enough for the best card and rate? Just how much credit might you get  if you are approved? What does everyone else […]

Posted by New credit score tool offers insight into getting the best credit card | Reuters Money | Report as abusive

[…] a certain poser about requesting for a credit card: Is your credit measure good adequate for a best label and rate? Just how many credit competence we get  if we are approved? What does everybody else […]

Posted by New credit measure apparatus offers discernment into removing a best credit card | Report as abusive

[…] a certain mystery about applying for a credit card: Is your credit score good enough for the best card and rate? Just how much credit might you get  if you are approved? What does everyone else […]

Posted by New credit score tool offers insight into getting the best credit card – Reuters Blogs – How To Get To 850 Credit Score | Report as abusive

[…] a certain poser about requesting for a credit card: Is your credit measure good adequate for a best card and rate? Just how many credit competence we get  if we are approved? What does everybody else […]

Posted by Credit Card Approval Guide » Blog Archive » New credit score tool offers insight into getting the best credit card | Report as abusive

[…] a certain mystery about applying for a credit card: Is your credit score good enough for the best card and rate? Just how much credit might you get  if you are approved? What does everyone else get?Now there […]

Posted by New Credit Score Tool Offers Insight Into Getting The Best Credit Card | How To Fix Your Credit Guide | Report as abusive