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Variable Rate Loophole in the Credit CARD Act

This article was written by in Credit. 12 comments.

I’m still looking for a second news source to back this up, but the circumstantial evidence is strong. We got a notice to our “tips” e-mail address about a loophole in the recently-passed Credit CARD Act of 2009, namely:

The law requires credit card companies to give 45 days notice of a rate increase, but only if the card has a fixed rate. The law also requires rates to stay the same for one year after a new account is open, but only for fixed rates.

And since credit card issuers are proactively punishing customers as a result of new legislation which hasn’t taken effect yet, they’ve also decided to start changing fixed-rate cards to variable-rate cards. Simply switching the rate type will enable the banks to raise rates whenever they want, again.

With a variable rate, rates generally rise as interest rates rise, and fall in a declining-rate environment. With rates already near a bottom and expected to rise, most consumers probably won’t see their rates fall further.

Not all customers are being affected, but Bank of America, Chase and Discover have all announced this change for some of their customers.

With some of the banks, you can opt out of the change, which of course comes with a requirement to close the account. The last time our readers encountered this widespread kind of change, they had a surprising amount of luck getting their original terms back by calling and talking to the right people, in the right way. Hopefully many of you can manage the same thing this time. Let us know in the comments.

Fixed-Rate Credit Cards May Vanish , Jane J. Kim, Wall Street Journal, July 13, 2009

Published or updated July 14, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Smithee formerly lived primarily on credit cards and the good will of his friends. He is a newbie to personal finance but quickly learning from his past mistakes. You can follow him on Twitter, where his user name is @SmitheeConsumer. View all articles by .

{ 12 comments… read them below or add one }

avatar jason

I think what this means is… I will try to give an easy example, for everyone to understand.

When credit card companies offer someone a variable rate it is usually something like PRIME + 2.49%, for example. In this case we will assume that prime rate is 5.00% (5.00%+2.49%=7.49%, 7.49% is what a customer would be paying on his or her credit card). When the prime rate goes up to lets say 5.25%, this customer now has a rate of 7.74% (5.25%+2.49%=7.74%), which changes on a monthly or quarterly basis. So, if the rate had been at 7.49% (the original rate, prime plus 2.49%) on January 21st (assuming that a customer has a cycle date of the 21st) and on the 31st of January prime rate was increased to 5.25%, there would be no way for credit card companies to notify customers of this change, thats 45 days in advance. How? Since their bill went out 10 days ago, and is due by the 21st of February (assuming they have 30 days to pay it back). However if the banks were to send a notice in time for the customer to pay the following months bill, the 21st of March, that would be more than 45 days where credit card companies would lose money, that they would have otherwise earned on the 0.25% increase in prime. Unless the FED decides to give banks notice that prime rates would increase/decrease 45 days before they actually do increase/decrease.

This is different than when a customer has a 7.90% fixed rate and credit card companies have to notify him or her that the rate will go up to 9.90%, the new rate could be fixed or variable, whatever the credit cad companies decide. In this case credit card companies can send a notice on the 31st of January stating new rate will be 9.90% starting on March 21st cycle date…

That is why they do not need to give a 45 day notice for variable rate changes. Sorry for the long reply.

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avatar Marc

This was not a loop hole., it was written in to the law. I am sure the many lobbyists hired by the banks worked long hard to make sure it was there. People should remember that when you ask for government protection, you better hire many lobbyists and make many campaign contributions or expect to get the short end of the deal.

Health care will be no different.


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avatar Steve

Just wanted to add a little context to the discussion. Jason did a good job of explaining how a variable-rate change would occur – and keep in mind the “prime” or other index must be outside of the creditor’s control. Thus, it would be the Fed adjusting interest rates – impacting the index (i.e. prime rate) that pushes rates up or down.

But this is far from a “loophole” in the Credit CARD Act. Similar language has been in Regulation Z since 1981 (which is written by the Federal Reserve to implement the Truth in Lending Act – the law the Credit CARD Act amends). That language is in 12 C.F.R. 226.9(c) – and here is the language from the Federal Reserve’s staff commentary:

“9(c) Change in Terms
1. Changes initially disclosed. No notice of a change in terms need be given if the specific change is set forth initially, such as: Rate increases under a properly disclosed variable-rate plan, a rate increase that occurs when an employee has been under a preferential rate agreement and terminates employment…….”

Currently, when an index changes no advance notice of the change-in-terms is required (currently it is a 15-day notice until August 20, 2009 when the 45-day notice is required).

If this was a “loophole” and Congress closed it in the future, the change would not be a shift from “fixed-rate” to “variable-rate” – it would be an additional switch to less credit cards being offered and consumers needing to seek personal loans instead (not necessarily a bad thing).

Also, another provision of the Credit CARD Act – Section 103 – limits the ability to market a credit card as “fixed.” If a credit card is called “fixed” in advertising or other areas – its rate can never be increased. Is that practical for an institution to offer when interest rates are bound to increase in the next few years? Remember, credit card accounts are open-end credit and can extend indefinitely into the future. If a bank stayed with “fixed” rate cards – it would have to anticipate those increases now; who can guess when and how much interest rates will change??

The solution by many card issuers is to remove the guessing about interest rates in the future – and that is done by moving to variable-rate accounts.

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avatar Dan

My BofA card fixed at 10.9% just got switched to a variable rate where the current rate is 10.9%. The variable rate is prime + 6.8% or something like that.

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avatar Sean

I actually got a letter in the mail a week or so ago that my wife’s credit union credit card would be switching to a variable rate from a fixed rate. At the time it seemed odd, but now it makes total sense they just want to be able to switch our rate whenever they please. Ah well, one more reason to keep paying off the credit card bill every month.

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avatar jason

They wont be switching the rate whenever they please, but wheneer the FED decides to increase/decrease prime rate.

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avatar MoneyMateKate

My Citibank card went from a fixed 12.9% to Prime + 13.99%, but here’s the real kick in the head: if the Prime rate is below 6%, too bad. So my card will never be less than 19.99%. Pretty sure they’re gambling on my potential to need to carry a balance at some point. I take some joy in knowing that the 1% cashback I get using that card wipes out most of the profit they make on my transactions from the vendor fees. I’m sure they’ll plug that hole within the next 12 months.

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avatar Kristen

Nice reporting and conversation. I hope credit card holders are paying attention and opening the notices they’re getting in the mail. The rules keep changing…

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avatar Mardi

American Express has jumped on the bandwagon! We just got a notice in the mail that they are changing us from a fixed rate to a variable rate and increasing it immediately from 12% to 15%. After eight years of paying on time and loyal patronship, we were shocked to find out that a phonecall only offered us a $150 credit for being a good customer! Well, that was the end of that card! We don’t want to support that sort of bad business practice!

What ever happened to the customer is always right????????????

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avatar Steve

Bank of America just switched my Gold Option line of credit from a 10.9% Fixed rate to 10.9% Variable without an opt out provision. Ironic that when I applied for the line of credit by phone a year and a half ago they assured me it was a “fixed” rate.

As a former consumer credit compliance officer at a top 10 bank I understand the need for banks to not be painted into a corner when their cost of funds can change over time. That is why they should be able to change rates with resonable notice and by giving the borrower an option to keep the old rate on existing balances and forego future credit access.

However, it seems as if the “changing market conditions” were created by the the lenders themselves through bad lending decisions made over the past decade. With their costs of funds at an all time low the margin between their cost and current credit card and to a lesser extent loan rates appear to be at historical highs. Not only has the tax payer bailed them out so they continue to exist the consumer now get to pay higher interest costs to insure future profitability despite their failures.

Switching a borrower from fixed rate to variable rate under the current historically low rate market conditions and it not being considered a rate increase borders on criminal. The effective result is a rate increase without proper notification over the life of the contract.

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avatar Dave

I found out last night my Amex card was switched from fixed to variable. Total BS. I called and they said all Amex Blue cards have changed. So now I have a 14.24% variable rate. If the Credit Card Company and Banks want to change the terms of the cards fine let them but any past balances acquired/held under the old fixed terms should not be affected. Only new purchses should be subjected to the variable rates.
Government won’t do diddly about these guys except maybe give them another billion dollar bailout with our tax money.
Looking at the big picture this is a good thing. People (including me) need to open their eyes and realize we should not be dependent on these companies. Lets get back to cash only purchases and put these idiots out of work.

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avatar Kevin

I understand that when a credit card company wants to increase your interest rate they now need to give an option to opt out which will close your account and pay the balance at the lower rate. What I don’t know is that if I have a closed account through the opt out option or closed at my request with a variable rate, will the increase in the prime rate cause an increase in the interest rate on the closed account???

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