How Fed rate increase will affect the interest you pay on your credit cards


July 04, 2004|By EILEEN AMBROSE

MILLIONS of consumers will get a firsthand look at Federal Reserve monetary policy in action when they tear open their next credit-card statement.

After four years without a rate increase, Fed policy-makers last week raised a key short-term interest rate by one-quarter of 1 percent. Many credit-card issuers won't waste much time adjusting the rates they offer customers, experts said.

The average interest rate on variable-rate cards last week was 13.5 percent, according to, and a quarter-point increase won't have a big impact. Someone with a $10,000 card balance, for example, will pay an extra $25 a year in interest.

But rate increases aren't likely to stop here. Economists predict a few more rate increases from the Fed this year, gradually pushing the short-term federal funds rate from 1.25 percent to 2 percent.

"It's a slow burn. It will slowly eat into that discretionary income," said Robert McKinley, chief executive officer of, an online publisher of card information based in Frederick.

Credit experts suggest now is a good time for consumers to review the plastic in their pockets. In the past year, many card issuers have increased fees and made it easier for customers to trigger penalties. And card terms might be in for further change as rates are raised, experts said.

Some also recommend that in a rising interest environment, consumers might reconsider how much debt they carry on plastic.

"Everybody is talking about that we can't borrow as much" when rates go up, said Jim Tehan, a spokesman with Myvesta, a consumer education group in Rockville. "This could be a great wake-up call to get better control of finances. It's a lot harder for [consumers] to get deeper in debt, which isn't such a bad thing."

The first cardholders to notice a change as a result of the Fed move will be those with variable-rate credit cards, which are half the cards in the marketplace. The interest rate on most variable-rate cards will go up this month or next, McKinley said.

A fixed-rate card is no protection against rising rates. Still, it will take a little more time before fixed-rate cardholders feel the impact of rising rates, experts said.

Issuers must give consumers 15 days' notice if a fixed rate is being changed. If the Fed raises rates a second time at its meeting next month, card issuers will likely begin notifying cardholders that their fixed rate is going up, McKinley said. And if interest rates continue to climb, he said, some issuers will abandon the fixed rate and switch their customers' cards to variable rate.

"There is no such thing as `fixed' in the card industry," he said.

While issuers are making interest-rate changes, they also might revise a card's other terms, McKinley said. For example, more issuers might move to a 20-day grace period from a 25-day period - the time when customers don't have to pay interest on new purchases, he said.

Consumers should closely read their statements and any notices from the card company in future weeks to catch any revisions, McKinley advised.

Some consumers, though, might not be aware that their terms have already changed over the past year. Fees and penalties have been climbing.

"They are larger and you get hit faster," said Gerri Detweiler, author of The Ultimate Credit Handbook.

Consumer Action, an advocacy group based in California, recently examined 140 cards issued by 45 banks. The group found that late fees averaged $27.45, a 60-cent increase in one year. Some late fees at major banks were as high as $39.

Nearly 60 percent of banks surveyed also had a cut-off time for late payments. That means even if your payment arrives on the day it's due, you can be whacked with a late fee if it comes in an hour or so after the cut-off time.

It gets worse.

Most banks punish consumers by raising their interest rate if they are late once or twice with a payment or go over their credit limit, Consumer Action said. The average penalty rate was 22.9 percent, or 1.38 percentage points higher than a year ago. Some penalty rates, though, are a steep 29.99 percent.

Even making on-time credit card payments doesn't always protect you against penalty rates. Forty-four percent of banks surveyed will raise your card's rate if you are tardy paying another creditor, Consumer Action found.

The consequences can be severe.

Take a card with a 14 percent interest rate and a $2,500 balance. By making the minimum payment each month, it would take 16 years and paying $1,980 in interest to erase the debt, Tehan said.

But what happens if your card issuer penalizes you by doubling your rate to 28 percent? Now it would take 101 years to pay off the card through minimum payments and over that time you - and your heirs - would have paid $30,165 in interest.

Linda Sherry, editorial director with Consumer Action, said people can avoid late fees by sending in the minimum payment - 2 percent to 3 percent of the balance - a week or two before the due date.

If you do get slapped with a late fee, complain, Detweiler advised. Card issuers occasionally will waive a late fee for consumers with a track record of on-time payments, she said.

And shop around. Even if rates go up, it's a competitive industry and there are still cards being offered with attractive terms, experts said.

Online resources for finding a card include www.cardtrack. com, and

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at

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