Variable versus Fixed-Rate Credit Cards

An excerpt from How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line.

All cards can be classified as either fixed or variable rate. Fixed rate means the interest rate never changes—at least, in theory. The rate on variable-rate cards, however, can go up or down, depending on the prime rate. Variable rate cards have become much more prevalent in recent years. In 2006, 86% of all credit cards were variable rate, while five years earlier, fixed-rate cards were more widespread than variable rate cards.

The rates of most variable cards mirror the prime rate. If the prime rate increases .25%, the rate on the card also increases .25%, typically by the next billing cycle.

Almost all variable-rate cards in the United States are tied to the prime rate, but it’s only one index issuers use to decide on rates. A few cards are tied to the London Interbank Offered Rate (LIBOR), the rate banks pay when they borrow money from each other in England. (The LIBOR is usually lower than the prime rate.) A few cards are tied to other indices, such as Treasury Bills. The index should be disclosed in the Schumer Box.

Although lenders start with the prime rate, very few cards have rates at or below prime. Lenders determine the actual rate of a variable rate card by adding the spread, a certain number of percentage points or “basis points,” to the prime rate. For example, under “Variable Rate Information,” a Schumer Box might say “Prime + 6,” meaning that the rate is determined by adding the prime rate plus a spread of 6%. Add the current prime rate of 3.25% to the spread, and you’ll find out that the effective interest rate is 9.25% (3.25% + 6%). It’s simple math.

Exceptions to the Rule

One notable exception is called a floor, which is a minimum rate that goes into effect if the prime rate drops below a certain level. For example, let’s assume the rate on your card is “Prime + 4%,” with a floor of 10%. If prime drops to 5%, your card would still have a 10% APR. No 9% (5% + 4%) for you because of the card’s 10% floor.

Until recently, only a few cards had rate floors, particularly cards targeted to consumers with bad or no credit. Now, more cards are using rate floors to avoid having to pass on all of the Fed interest rate cuts that we’ve recently witnessed. According to Linda Sherry, Director of National Priorities for Consumer Action, a national non-profit education and advocacy organization, rate floors can also be associated with default and cash advance APRs. Sherry points out that the “never lower than” rates for penalty and cash advance APRs are always very high.

Some card issuers reserve the right to change the terms and conditions, including the APR, for virtually any reason…at any time. The controversial universal default clause is one way card issuers justify such changes.

I sincerely hope these tips help you understand some of the nuances of variable rate cards. Understanding such nuances could translate into huge savings in your finance or interest charges. Please share your thoughts on this topic in our active credit forum.

As a reminder, you can compare low rate variable and low fixed rate credit cards on CardRatings.com!

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This article was written by Curtis Arnold, a nationally recognized consumer educator and advocate. Curtis has been educating consumers about credit cards since 1998. He is regularly interviewed and quoted by respected members of the national press regarding consumer credit issues. His new book, How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line is available now! Order online and receive up to a 32% discount.

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CardRatings.com is the most comprehensive source for comparing credit card offers. CardRatings.com is pleased to offer consumers free credit card ratings.

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Please Note! You are welcome to republish this article as long as you state that CardRatings.com is the source for the article. You must also include a link to our website if you republish the article online. Click here for more details about using our articles and thank you for your interest!

Re-thinking Credit Card Choices (Part 2)

By Michael Killian, CardRatings.com Reporter

Editor's Note: This article is the second of a two-part interview with Linda Sherry, the Director of National Priorities at Consumer Action.

Mike: It has been suggested that those with good credit scores will find good credit card deals and those with poor scores will not find cards available at all. Are you finding this true and if so what can folks do to improve their scores?

Linda: I think this is true. People with poor scores should avoid the products that target their demographic with high upfront fees and tiny lines of credit. Instead, look for a good secured card.

The best advice I can give people about improving their scores is pay your bills on time (or even early!), do not use over 40% of your lines of credit (the lower utilization the better), and check your credit report for errors or possible identity theft on a regular basis. Each year, always get free copies of your credit reports (from the 3 major credit bureaus) from AnnualCreditReport.com.

If you are already in default or charged off status on credit accounts, it is going to take super-human efforts and many years to improve your score. Don't go there in the first place.

Mike: What will happen with credit card fees and penalties in this credit crunch?

Linda: We are already seeing increases in rates and new monthly fees for card customers. Until the new Fed rules take effect in July 2010, I think we will continue to see blanket re-pricing for "economic conditions" as well as risk-based repricing on individual accounts.

Mike: Do higher interest, decreased rewards, and fewer offerings seem to be the trends? Do you see other trends?

Linda: One thing we are seeing is a new and "creative" fee such as the Chase monthly fee for people with low promotional rates.

Mike: Are there cards consumers should be looking to?

Linda: Dare I say that any card from the top six banks is pretty much the same as any other? Just make sure that the reason you pick a card has nothing to do with pretty pictures on the front and everything to do with what is in the fine print.

Getting a reward, such as a cash rebate, is useful, especially if paid in full every month. Let's just keep our fingers crossed that the companies don't take back the most robust rewards.

Mike: Do you have any other comments you'd like to make?

Linda: I'd like to see people help us in our efforts to get new laws passed in Congress to protect credit card users. Check out our Take Action Center. Not only do we have specific alerts you can write to your lawmakers about, but also we allow anyone to write anything they want to their lawmakers, local and state officials, and news outlets. All free, but of course, we accept donations if the spirit moves you! You can also sign up for email alerts.

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This article was written by Mike Killian, Founder of Learning Credit and Debt Management. Mike has been writing about credit and debt management issues that are of importance to consumers for over 8 years. His articles have been referenced by various members of the media, including MSNBC and The Motley Fool. Mike has also offered debt elimination seminars to businesses and community colleges for many years.

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CardRatings.com is the most comprehensive source for comparing credit card offers. CardRatings.com is pleased to offer consumers free credit card ratings.

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Please Note! You are welcome to republish this article as long as you state that CardRatings.com is the source for the article. You must also include a link to our website if you republish the article online. Click here for more details about using our articles and thank you for your interest!

Re-thinking Credit Card Choices (Part 1)

By Michael Killian, CardRatings.com Reporter

Editor's Note: This article is the first of a two-part interview with Linda Sherry, the Director of National Priorities at Consumer Action.

Exceptional times often require exceptional measures to deal with events. No one doubts or questions the seriousness of our economy. Consumers are cutting spending and shedding debt whenever and wherever possible. The commercial market place is affected by this trend. What does this mean for consumers in return? What credit cards should they be considering? How can consumers pay down their debt?

Linda Sherry, the Director of National Priorities at Consumer Action, was very helpful in answering these and other questions.

Mike: Are you seeing one group of people more affected by the economy downturn than others?

Linda: I think everyone is hurting right now. Many people have retirement accounts and home values that have diminished considerably, all while dealing with tightening consumer credit. People are telling us that their credit limits are being cut, interest rates increased, and some customers with promotional rates are being hit with $120 annual fees unless they accept a higher interest rate. With the layoffs, many people are using credit cards to keep their family finances afloat.

Mike: Some financial advisors have suggested that openly discussing personal credit card debt is highly taboo. Have you found this to be true and could this be a stumbling block to recovery?

Linda: We hear from a lot of people who are burned by credit card companies. But I do notice that many of them aren't prone to mentioning the outstanding balance amounts that they are carrying. I am often shocked when people tell me they are carrying $10K, $20K, and even $30K on credit cards. How did the companies allow people to carry balances of this magnitude? Why would people want to have these balances on their backs?

With balances like these, you have to wonder if it's an addiction. Besides small business owners, who may legitimately use credit cards to build business and help cash flow, it's not hard to imagine that people who have been allowed to run up $30K in credit card debt feel a little shame. In addition, there may be problems of self-esteem, depression, and shop-a-holism that allowed the balances to grow so high. A group like Debtor's Anonymous can be helpful in these cases, if people can face up to the magnitude of the problem.

But personal responsibility goes only so far...the banks have a responsibility not to extend such enormous amounts of credit and not to suddenly change the terms to throw consumers into even a worse place financially with higher interest rates, fees, and punitive terms. Banks need to scrutinize new applicants for unsecured credit more closely. They really need to ensure that there is adequate income to repay unsecured debts.

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This article was written by Mike Killian, Founder of Learning Credit and Debt Management. Mike has been writing about credit and debt management issues that are of importance to consumers for over 8 years. His articles have been referenced by various members of the media, including MSNBC and The Motley Fool. Mike has also offered debt elimination seminars to businesses and community colleges for many years.

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CardRatings.com is the most comprehensive source for comparing credit card offers. CardRatings.com is pleased to offer consumers free credit card ratings.

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Please Note! You are welcome to republish this article as long as you state that CardRatings.com is the source for the article. You must also include a link to our website if you republish the article online. Click here for more details about using our articles and thank you for your interest!

Using a Low-Rate Credit Card to Your Advantage

An excerpt from How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line.


The three Keys to Using a Low-Rate Credit Card to Your Advantage:

1. Make your payments early.

If your card issuer uses the average daily balance method to calculate interest (most do), make your payments before the due date to reduce the interest bite. According to Nancy Castleman, cofounder of GoodAdvicePress.com, lenders are required to credit your payments when they are received, so the earlier you pay your credit card bills, the lower the average daily balance will be. The less you owe, the more you’ll save in interest. Bottom line: To save the most, pay as early as you can-and as often as you can, for that matter.

2. Avoid the dreaded default rate.

With any card, particularly a low-rate card, make sure you always do the following:

• Make your payments on time.


• Never exceed your credit limit.


• Don’t write a check for payment that is dishonored.

Otherwise, you might end up getting hit with a default (aka penalty) rate, which is normally much higher and can be over 30%. Ouch!

You should know the default rate of your current cards and any cards that you’re considering. (Check the Schumer Box.) Perhaps more important, pay attention to what can trigger the default rate.

Especially if you can’t trust yourself to follow my tips to avoid a rate hike, look for the lowest default rate you can find. Some smaller card issuers, such as Simmons First National Bank in Arkansas, offer default rates in the mid-teens, while the average default rate in 2007 was 24.51% according to Consumer Action.

Finding out what triggers the default rate can be a challenging proposition because this information is not normally adequately disclosed. Fortunately, you can easily search default rate triggers by perusing the New York Banking Department’s quarterly online survey.

One worst-case scenario should encourage everyone to pay their bills on time: Some lenders charge a default rate if you’re only one day late making one payment. Other issuers institute a penalty rate if your monthly minimum payments are late twice in any portion of a 12-month period. Exceeding your credit limit is also a common default pricing trigger.

Finally, those late payments with other creditors, or even late payments to utility companies can result in default pricing. That controversial universal default clause can cost you money here, too, as can that lovely phrase, “anytime for any reason.” That’s where issuers can raise your rate strictly based on information in your credit report or a change in your credit score (more on this practice later).

Already paying a default rate? Find out what you have to do to get your account changed to a lower rate. Some lenders require you to make 6 or 12 consecutive on-time payments before the rate returns to the normal purchase APR. But the policies vary greatly.

3. Consider credit score implications.

Every time you apply for a new account, your credit score usually drops a few points. As a general rule, I recommend that you don’t apply for more than one new account every 6 to 12 months.


A similar question that I am frequently asked is, “How does taking advantage of multiple balance transfers affect my credit rating?” View points on this vary from “Risky” because of all of the open credit accounts that it produces, to “It really doesn’t change things much.” The general consensus among experts is that you credit ratings will not be adversely affects…as long as you do not do so excessively. In fact, some experts, including myself, maintain that “balance transferring” can actually improve your credit rating, at least in some instances.

More important, be careful not to use most of the credit limit on any of your cards (commonly called maxing out a card). Doing so really causes your credit rating to suffer. Ideally, you want to use only 10% or less of your credit limit. The higher your utilization, the more your score will suffer.

Finally, never make a late payment-never! Not only will this affect your credit score (generally when you are 30 days or more late), but as I’ve already showed, just one late payment could raise your low rate to exorbitant levels. And if you have more than one card, that single late payment can have a domino effect, with your other cards hiking up your rates.

For more tips on using low-rate credit cards, and other valuable credit card tips, check out Curtis' new book, How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line.

This article was written by Curtis Arnold, a nationally recognized consumer educator and advocate. Curtis has been educating consumers about credit cards since 1998. He is regularly interviewed and quoted by respected members of the national press regarding consumer credit issues. His new book, How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line is available now! Order online and receive up to a 37% discount.

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CardRatings.com is the most comprehensive source for comparing credit card offers. CardRatings.com is pleased to offer consumers free credit card ratings.

---

Please Note! You are welcome to republish this article as long as you state that CardRatings.com is the source for the article. You must also include a link to our website if you republish the article online. Click here for more details about using our articles and thank you for your interest!

Fed Cuts Key Rate By One-Quarter of a Point: Credit Card Users Will Likely Benefit

By Jessica Austin, CardRatings.com Public Relations Associate


The Fed announced a 25 basis point rate cut, bringing a key rate to 2.00 percent. The prime rate will also fall one-quarter of a percentage point to 5.00 percent. The move by the Federal Open Market Committee followed several rate cuts in the first quarter of 2008 that brought the federal funds rate down to its lowest level since December 2004.

This was the seventh consecutive rate cut. The Fed said in the statement accompanying the rate-cut announcement:

"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability."

So, why is this happening? The goal is to promote spending and borrowing to boost the economy and to recharge the buying power of American consumers.

According to John Hoefl, a financial advisor with Ameriprise Financial in Little Rock, Arkansas:

"The rate cuts will be especially great for consumers if they take advantage of low rate cards such as Simmons Bank and Pulaski Bank. They have some of the lowest rates in the country."

The good news for some cardholders is that since the prime rate fell, interest rates on many variable rate credit cards will fall as well. Most credit cards issued today have variable rates that typically move up and down in response to the prime rate.

Curtis Arnold, Founder of CardRatings.com and author of How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line, notes:

Given the recent rate cuts, if you are paying over 10% on your current credit card and you have a credit score above 700, then I would strongly suggest that you search our listings of low rate credit card offers.

The rate cut should have a positive impact on most consumers that are revolving credit card debt on variable rate cards. Unfortunately, though, a significant portion of consumers will see no benefit at all for various reasons. For example, consumers with fixed rate credit cards will see no changes in their rates. The current average rate based on all the cards listed in our comprehensive database is about 12.5%."

It is worth noting that this latest rate cut brings the total rate cuts to 3.25 percentage points since September 2007. Many analysts feel this rate cut may be the last one that the Fed does for a while. Time will tell!

This article was written by Jessica Austin, Jessica joined our staff on a part-time basis recently, but has previous work experience in the credit industry where she served in a managerial capacity. She has met the equivalent hours requirement for a bachelor's degree in sociology/media relations from Southern Arkansas University in Magnolia, Arkansas and is currently pursuing a master's degree from the International School of Divinity.

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CardRatings.com is the most comprehensive source for comparing credit card offers. CardRatings.com is pleased to offer consumers free credit card ratings.

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Please Note! You are welcome to republish this article as long as you state that CardRatings.com is the source for the article. You must also include a link to our website if you republish the article online. Click here for more details about using our articles and thank you for your interest!

Fed Cuts Key Rate By Three-Quarters of a Point: Credit Card Users Will Likely Benefit

By Jessica Austin, CardRatings.com Public Relations Associate


The Fed announced a 75 basis point rate cut, bringing a key rate to 2.25 percent. The prime rate will fall three-quarters of a percentage point, also, to 5.25 percent. The move by the Federal Open Market Committee followed a half-percent rate cut Jan. 30 and brought the federal funds rate down to its lowest level since December 2004.

This was the sixth consecutive rate cut. Also in September, the fed funds rate stood at 5.25 percent. The Fed said in the statement accompanying the rate-cut announcement:

"Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters."

So, why is this happening? The goal is to promote spending and borrowing to boost the economy and to recharge the buying power of American consumers.

According to John Hoefl, a financial advisor with Ameriprise Financial in Little Rock, Arkansas:

"The rate cuts will be especially great for consumers if they take advantage of low rate cards such as Simmons Bank and Pulaski Bank. They have some of the lowest rates in the country."

Why didn't the Fed cut rates a full point as was rumored by some analysts? A cut of a full percentage point had been widely expected, but the Fed apparently believed that would be too inflationary:

"Inflation has been elevated, and some indicators of inflation expectations have risen," the central bank said in its policy statement. "The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased."

According to the Fed,

"The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."

The good news for cardholders is that since the prime rate fell, over the coming weeks and months interest rates on most variable rate credit cards will fall by 75%. Most cards issued today have variable rates that typically move up and down in response to the prime rate.


Curtis Arnold, Founder of CardRatings.com and author of How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line, notes:

Given the recent rate cuts, if you are paying over 10% on your current credit card and you have a credit score above 700, then I would strongly suggest that you search our listings of low rate credit card offers. The rate cut should have a positive impact on most consumers that are revolving credit card debt, though not all consumers will benefit. An example would be a cardholders that has a fixed rate card. The current average rate based on all the cards listed in our comprehensive database is 12.82%."

It is worth noting that this latest rate cut brings the total rate cuts to 3 percentage points since September 2007.

This article was written by Jessica Austin, Jessica joined our staff on a part-time basis recently, but has previous work experience in the credit industry where she served in a managerial capacity. She has met the equivalent hours requirement for a bachelor's degree in sociology/media relations from Southern Arkansas University in Magnolia, Arkansas and is currently pursuing a master's degree from the International School of Divinity.

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CardRatings.com is the most comprehensive source for comparing credit card offers. CardRatings.com is pleased to offer consumers free credit card ratings.

---

Please Note! You are welcome to republish this article as long as you state that CardRatings.com is the source for the article. You must also include a link to our website if you republish the article online. Click here for more details about using our articles and thank you for your interest!