Credit card rates a ticking time bomb?
Your blogger leads a sadly unexciting existence, and has never seen a real-life listening device or time bomb. He has however, seen plenty of them in movies and television shows. And he’s constantly amazed that they all seem to go out of their way to advertise their presence. A secret agent pushes the on-switch as she plants a bug, and a red light starts flashing. What’s that for? To drain the battery or to make the gadget easier to find? Similarly, the count-down displays on time bombs are invariably so flashy and garish that they wouldn’t be out of place in a Palm Beach McMansion. Surely, in the real world time bombs are made to look as unnoticeable and innocuous as possible.
Credit card rates time bomb
Certainly, few seem to have noticed the credit card rates time bomb that’s currently, almost imperceptibly, ticking away. Yesterday, the Federal Reserve announced that, yet again, it’s maintaining the target range for the federal funds rate at 0 to ¼ percent. That’s hardly news; the target range has been at that level for so long that most Americans seem to have forgotten the pain that high interest rates can bring.
Nowadays, few homeowners have adjustable-rate mortgages (ARMs), so they don’t have to worry about those when interest rates eventually begin to rise again. But many consumers have variable-rate credit cards, and they–at least those who carry credit card debt–should be aware of what they could be facing when rates do start to move upwards, as they almost inevitably must.
Credit cards and fixed/variable rates
Perhaps because rates are currently a non-issue, there are few studies about their impact on credit cards. However, when The Pew Charitable Trusts’ Safe Credit Card Project reported in October 2009, it highlighted the potential problems.
It acknowledged that the credit card regulation that had then just been enacted prevented issuers from arbitrarily imposing penalty rate rises except in exceptional circumstances. But it went on to report that fixed-rate cards had become “rare”. It found that in July 2009, fewer than 1 percent of bank credit card offers provided for fixed rates, down from 31 percent at the end of 2008, just months earlier. And it raised another issue:
As issuers move away from “fixed” rates, Pew’s research shows, there is a related and possibly troublesome trend emerging. A growing number of credit cards include terms designed to ensure that even variable rates will not fall lower than a fixed minimum. For these cards, issuers will benefit as interest rates rise according to operation of an index rate, but many cardholders will be prevented from enjoying the benefits of falling index rates due to the fixed floor limits set by issuers. We call this mechanism a minimum rate requirement.
No credit card debt, no sweat
Of course, if you have no credit card debt, you don’t have to worry. Rates are only an issue for those who pay them. But if you do carry forward significant balances each month, now might be a good time to pay them down.
Overall interest rates are only likely to increase (lifting those for credit cards with them) when the economy starts to recover fully. If you want to enjoy all the benefits of that recovery, you can contain your future outgoings by reducing now your exposure to rate rises. In other words, you have the opportunity to start defusing your personal time bomb today, well before that flashy display nears zero hour.
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