Credit cardholders in good standing likely won’t see their interest rates go up anytime soon, thanks to a key decision by the Federal Reserve on Wednesday.
Since the landmark Credit CARD Act restricts banks’ ability to unexpectedly hike existing cards’ interest rates, borrowers with variable rate cards — which account for the majority of plastic — shouldn’t see their annual percentage rates (APRs) increase before the Fed raises its key lending rate. Prior to such a Fed decision, only serious mistakes by the cardholder, such as being 60 days late with a payment, can result in a change to their cards’ current APR without the issuer first providing 45 days’ notice.
When the Fed does eventually raise rates — which last happened in June 2006 and isn’t likely to happen again until this summer at the earliest — millions of U.S. cardholders will pay more to carry a balance. The reason? Over recent months, many banks have switched their cards from fixed rates to variable rates, which are tied to the prime rate. Due to its link with the fed funds rate, the prime rate fluctuates as the central bank moves its key lending rate up or down. And when the prime rate moves, variable APRs adjust immediately. “What the Fed does does affect credit card users,” says Bill Ford, a former Atlanta Fed president and current finance chair at Middle Tennessee State University in Murfreesboro.
But the Fed isn’t the only factor influencing rates. Regardless of what the central bank does, “that doesn’t mean banks won’t raise rates on certain users,” such as risky looking cardholders with low credit scores, Ford says. It just won’t happen without 45 days’ notice, thanks to the CARD Act.
Analyzing the Fed’s language
For now, however, the Fed’s latest announcement means most cardholders won’t experience suddenly higher APRs. While that should temporarily keep cardholders happy, analysts remain concerned with the future direction of monetary policy, which the Fed uses to influence the cost of borrowing and support the economy. To get an idea of that policy direction,. Fed watchers dig for clues buried in the language of FOMC announcements.
In its latest announcement, the central bank once again said lending rates may remain “exceptionally low” for an “extended period.” Kansas City Fed President Thomas M. Hoenig was the sole dissenting voice for the third straight meeting, voting against the decision to leave interest rates unchanged.
Until the economic recovery looks to be self-sustaining — no longer requiring the government’s support — the Fed is likely to leave rates unchanged. “Growth in household spending has picked up recently,” the Fed statement said, “but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.”
Consumers show signs of life
Despite those problems, recent economic data seems to confirm that things are looking up for consumers. According to data from New York-based private research group the Conference Board, consumer confidence in April reached its highest level since September 2008, the same month investment bank Lehman Brothers declared bankruptcy and the financial markets went into a tailspin.
“Consumers’ concerns about current business and labor market conditions eased again. And, their outlook regarding business conditions and the labor market was also more positive than last month,” said Lynn Franco, director of the Conference Board’s consumer reseach center, in a press release. Still, Franco noted that further employment gains are still needed. “Looking ahead, continued job growth will be key in sustaining positive momentum,” Franco said.
Economists say jobs are also the key to monetary policy. With unemployment still hovering near 10 percent, the economy will need to prove its strength before lending rates can come off of record lows. It’s “unlikely the Fed moves until employment shows sustained growth,” says Wells Fargo chief economist John E. Silvia in an e-mail, adding he doesn’t expect the Fed to adjust rates through its June 22-23 meeting.
Eventually, experts say the Fed will have to abandon its “extended period” language and adjust monetary policy. “Sooner or later, they have to get off their dead horse and let us know they’re going to raise rates,” says Ford.