Payment Card News

Rate Hike II

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They did it again! And they’ll continue to do it until they drive inflation away. For the second time in two months The Federal Open Market Committee voted to raise its target for the federal funds rate by 25 basis points to 5-1/4 percent. The Federal Reserve Board of Governors also approved a 25 basis point increase in the discount rate to 4-3/4 percent. Both actions mean higher credit card rates for consumers as the prime interest rate has now been pushed to 8.25%. More than 80% of bank credit cards in the U.S. carry a variable rate structure, with most based on the prime rate. About half of nation’s issuers adjust rates monthly, while the other half adjust quarterly. This means many cardholders will see this week’s rate hike in their September statements while others will see it in their October statements (if their issuer adjusts quarterly). This week’s rate increase will generate nearly $1 billion in additional interest charges over the next twelve months. Combined with June’s rate adjustment, consumers will shell out nearly $2 billion more in interest charges between now and next summer. For the average household, carrying $6,300 in card debt, a 25 basis point increase in the prime rate will raise annual interest costs by $16 or about $1.25 per month. Some cardholders escaped the June increase since it came after the cut-off date for many issuers who adjust rates quarterly. For example Citibank/AT&T Universal and MBNA cardholders did not get hit yet for the June increase. However this week’s increase comes well ahead of the next quarter, so for these cardholders a 50 basis point jump in their interest rate awaits them in October. Currently, interest rates for bank credit cards (VISA, MasterCard, Discover and American Express) stands at 17.27% compared to 17.11% in May and 17.54%, one year ago. The rate decline from one year ago was driven by competition, especially among issuers offering low, fixed interest rates. The rate increase since May is directly related to the Fed action in regard to short-term interest rates. As of mid-year, American consumers have racked up $454 billion in bank credit card debt and $97 billion in retail (store, gas, etc ) credit card debt.

          HOW  THE  BIG  GUYS  CHANGE  RATES
        (the top ten bank credit card issuers)

ISSUER            RATE  BASIS          ADJUSTMENT  DATE
Citibank           Prime Rate             Quarterly
BankOne/FUSA       Prime Rate             Quarterly
MBNA               Prime Rate             Quarterly
Discover           Prime Rate             Monthly
Chase              Prime Rate             Monthly
Bank of America    Prime Rate             Quarterly
Capital One        LIBOR                  Monthly
Fleet              Prime Rate             Quarterly
Household          Prime Rate             Monthly
Providian          Fixed Rates            NA

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