Fed cracks down on variable credit card rates

Online, February 3, 2010 (Newswire.com) - According to Fed-What goes up must come down, in regards to variable interest rate.
This week, the Fed revealed a new rule, that will force credit card issues to halt a growing industry tactic that benefited banks but troubled consumer advocates: The Fed said that on variable rate credit cards, interest rates must be allowed to fall, not just rise. This change is now part of the 1,155-page final Fed rules released Jan. 12 detailing how banks should implement the Credit CARD Act of 2009. It was of course welcomed and applauded by consumer groups.
It's good news for the increasing number of bewildered consumers who have variable interest rate credit card accounts that set "floors" on how low their rates could drop, but no ceiling on how high they could climb.
"The time has come for SOMEONE to finally crack down on credit card companies. The consumers have suffered long enough", said Tami Brown, The President and CEO of Turnkey Consulting, Inc and Past President and Founder of The Association of Settlement Companies (TASC). "Consumers have been trying to find some relief, and now there seems to be a light at the end of the tunnel, for some."
Floor no more?
According to a e-mailed response from Joshua Frank, a researcher from the Center for Responsible Lending and author of a December 2009 study about how credit card issuers were imposing new fees and dodging restrictions in the new credit card law: "The Federal Reserve's rules on variable rates create an environment that is safer and more fair for consumers," and also stated that "The Federal Reserve's rules on variable rates create an environment that is safer and more fair for consumers, when issuers tell the consumer that they have a 'variable rate,' that rate will vary fairly and honestly with an index rather than being manipulated by the issuer. The rules on variable rate floors as well as other limitations on variable rate manipulation will save consumers well over a billion dollars."
With this new law that restricts credit card issuer's previously unregulated right to increase interest rates of existing customers, comes a limited number of exceptions. Among them: Card issuers may pass along rate changes if the account has a variable interest rate tied to an index that is not under the issuer's control. The Fed's however, rules clarify that if a card issuer sets a floor on rates, it nullifies the exception.
The vast majority of credit card accounts now have variable interest rates. That means their annual percentage rates (APRs) are based on the prime rate plus a margin, which as of Jan. 13, 2010, is 3.25 percent. So, for example, an account with a variable rate of prime plus 13.99 percent would have a 17.24 percent APR.
'Troublesome' trend
Consumer groups noted another practice: Card issuers set the floors at high levels -- usually at the existing APR for a fixed rate account. "These floor rates create a situation where the interest rate is called 'variable,' but it can only vary upward relative to its starting value. The interest rates can never decline from where they start," according to Frank's report.
In addition, the Pew Health Group's Safe Credit Cards Project released in October 2009 found use of the floors for purchase APRs had increased from 1 percent to 9 percent among the largest issuers of credit cards. Pew researchers called it a "troublesome emerging trend."
Fed say Ceilings are OK
The Fed rules on variable rates includes another pro-consumer clause: Credit card agreements are permitted to have variable rate "ceilings" -- meaning the amount that APRs cannot exceed -- "because there is no disadvantage to consumers."