Credit Card Companies Adjust

David Lazarus over at the Los Angeles Times noted today that credit card companies are responding to Congress' recent credit card legislation in another way: by getting rid of fixed interest rates. Instead of a constant rate being paid on a credit card balance, more consumers will find their credit card rates changing as marked-based interest rates move. Needless to say, many people aren't happy.

I noticed that my credit card company, Chase, recently sent me some new disclosure language explaining that my fixed rate would now adjust based on some prevailing market interest rate. I just shrugged my shoulders, but that's because I don't run a balance. I can understand that those who do might be annoyed.

Here's a specific complaint, from Los Angeles resident Victoria Afonina, quoted by the LA Times:

"When I finally understood what they were saying, and that my rate could change every month, I was shocked," Afonina said. "I'm a good customer. Why are they treating me like that?"

Indeed, I am a good customer too. I've never been late for a payment, but I'll also have an adjustable rate going forward. What gives?

If variable rates are unfair, then banks are also treated very unfairly. The rates that they face when borrowing from the Federal Reserve (the discount rate) or each other (the federal funds rate) are also variable. As a result, a variable rate isn't arbitrary at all if it's based on the prevailing market interest rates. In that case, it's closely aligned with whatever interest rates the bank who issues your credit card faces for its own borrowing costs. In other words, a variable rate is actually less arbitrary than a fixed rate.

The article also explains a separate complaint:

"It's completely unfair," said Linda Sherry, a spokeswoman for Consumer Action. "It's an end run around the intent of the new law."

Let's consult the recent credit card legislation to determine what Congress had in mind. In it, the section about arbitrary interest rates states:

`(a) In General- In the case of any credit card account under an open end consumer credit plan, no creditor may increase any annual percentage rate, fee, or finance charge applicable to any outstanding balance, except as permitted under subsection (b).

One of those exceptions from "subsection (b)":

`(2) an increase in a variable annual percentage rate in accordance with a credit card agreement that provides for changes in the rate according to operation of an index that is not under the control of the creditor and is available to the general public;

In other words, Congress explicitly said that variable interest rates are okay, so long as the variable is market-based. That means that credit card companies are hardly trying to get around the new legislation -- the new law clearly states that variable rates are fair game, even on already outstanding balances.

This fact might not satisfy those who lament variable rate credit cards. Of course, they could just use cash instead.