Nearly 2 million Discover accounts to shift to variable-rate terms

Discover Card users should pay close attention to their monthly statements for word of interest rate changes, namely fixed rate accounts may be shifted to variable rate terms in the coming months. Variable rate credit card accounts are those that are based on the prime rate plus some fixed rate (such as 8.99 percent).

2 million accounts
Discover Financial Services spokesman Matthew Towson confirmed the change today in an e-mail: "The pricing changes will directly align accounts with increases or decreases in our funding costs. The changes will affect less than 4 percent of our card members and will go into effect Oct. 1, 2008," Towson writes.

Discover, the sixth largest issuer of general purpose credit cards, issued 49.2 million direct cards in 2007, according to The Nilson Report, a monthly payment card industry newsletter.

So, about 2 million account holders could find themselves paying out more in interest on their Discover cards and taking longer to pay off their debt if the Federal Reserve, as expected, starts raising rates.

But Discover is giving cardholders more than the minimum amount of advance notice on the change. Currently credit card disclosure laws (under Regulation Z of the Truth in Lending Act) require only 15 days' notice of changes to terms.

Says Towson: "Card members who wish to avoid the change to a variable rate have 45 days to opt out and thereby pay down their balances at their current fixed rate."

Note: Opting out means you can no longer use the credit card. As soon as you do, you'll be flipped into a variable rate. Default on the account and you could be hit with the 31 percent penalty rate Discover started in May.

The Federal Reserve Board is currently reviewing rule changes that would require at least 45 days' notice on changes so Discover is following the guidelines that may be finalized by the Fed by year's end.

Pendulum swinging
A few months ago, I wrote that Capital One had shifted some of its customers from variable rate accounts to fixed-rate terms back when the Fed was slashing the interest rates.

Now the pendulum has swung in the other direction. At the last Fed meeting, the Board of Governors decided to hold rates steady. Analysts believe that unless the economy tanks completely we've seen the last of the interest rate cuts. That means any future increases will benefit credit card issuers with variable rate accounts. On variable rate cards, Fed rate increases are passed right through to cardholders automatically.

When interest rates are falling, consumers benefit from having variable rate credit card accounts. Conversely, when interest rates are rising, fixed rate accounts are more attractive for consumers.

Exactly the opposite is true for the issuers, of course. They prefer fixed rate accounts when interest rates are falling and variable rates when interest rates are edging upward.

As Discover shows, it is the credit card issuer, however, rather than the consumer, that gets to decide the terms.

See related:
Fed leaves interest rates unchanged; card rates stay put, My interest rate dropped but not as much as the Fed cuts, Credit card industry statistics.