Banks may have left rates unchanged this week, but they nevertheless made some changes behind the scenes that could impact cardholders’ pocketbooks.
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Annual percentage rates on new credit card offers remained at 12.64 percent, according to the CreditCards.com Weekly Credit Card Rate Report. Despite the pause, APRs have been steadily rising. The latest result is up from 12.17 percent in early September. However, the real moves took place behind the scenes, as banks readied themselves for the Credit CARD Act, whose major provisions take effect in February 2010.
This week, Discover became the first major issuer to reveal how its cards will operate under the CARD Act. As early as December 2009, Discover will begin eliminating terms banned by the new regulations.
That means existing credit card balances will not see their interest rates suddenly increase, while both over-the-limit and pay-by-phone fees will be eliminated. However, Discover will also raise minimum payments and will switch cash advances to variable rates.*
The prime rate was unchanged after the Federal Reserve — the nation’s central bank — said Wednesday it would keep its key lending rate at a range of 0 to 0.25 percent. In its statement, the Fed said that despite signs of recovery, it continues to expect the delicate health of the economy to require “exceptionally low levels of the federal funds rate for an extended period.”
Banks are increasingly offering variable rate cards so that rates can rise automatically, without running afoul of the reform law’s restrictions, any time the Fed hikes rates. Variable rates are set using the prime rate, which is 3 percentage points above the federal funds rate. Currently, the prime rate at stands 3.25 percent.
For now, analysts say the Fed’s announcement won’t affect cardholders. “The impact on credit cards from this statement are negligible,” says Joe Brusuelas, director with Moody’s Economy.com. Brusuelas says that the Fed has moved away from using the federal funds rate to help the economy and toward the use of other tools, including the purchase of mortgage-backed securities.
However, as the central bank begins to put away these tools, borrowing rates — including those for credit cards — will rise. That resulting increase isn’t far off. “The market will begin to push rates up in the first quarter of 2010,” Brusuelas says
* As originally published, this article incorrectly stated that Discover would raise penalty interest rates. See the CreditCards.com corrections policy