My interest rate dropped, but not as much as the Fed cuts

I read my credit card statement every month. I hope everyone does.

This month there was a little surprise. My credit card interest rate dropped. I have a variable rate Visa card and the annual percentage rate (APR) was 11.24 percent in November 2007. The April statement shows it has dropped three quarters of a percent to 10.49 percent.

Trickle down
With all the reports about the Federal Reserve cutting interest rates for banks, I thought for sure some of that might eventually trickle down to my level. Problem is I didn't reap all the benefits of the rate cuts. The Fed has cut the federal funds rate by 3 percentage points since September 2007. By the time the effects of the cuts trickled down to me, the savings was only 0.75 percent.

This was expected as financial experts predicted credit card issuers would avoid passing along some of the Fed rate cuts in an effort to protect their own bottom line. Banks hit by the home mortgage meltdown would also want to make up for losses in those divisions by tapping their credit card sectors.

Of course, I'm not alone. Millions of credit card users likely experienced the same thing -- with modest declines in variable interest rates on accounts in good standing. By contrast, those in default on their accounts have seen interest rates skyrocket above 20 percent.  Even consumers with good payment records have complained that their credit card issuers have hiked rates for no apparent reason.

Locking in fixed rates
Capital One apparently has taken steps to eliminate the small interest rate decreases that consumers might reap.  According to a Wall Street Journal report, Capital One shifted a segment of its customers with variable rate accounts into fixed rate terms, presumably to avoid having to decrease interest rates if the Fed continues to lower the rate.

Declining interest rates are bad for issuers and prompt more fixed-rate terms. Rising interest rates make variable rate contracts more lucrative for the issuers. So Cap One’s latest moves are just part of the pendulum swinging in the opposite direction.

What's next?
Other credit card issuers may follow suit. So I'm not celebrating just yet over my 0.75 percent rate reduction. I'm waiting to see what next month's credit card statement brings.

See related: "Sorry, cardholders, your interest rate cuts come tomorrow"