When the Federal Reserve raises interest rates, as it did again Wednesday, your credit card’s APR almost certainly will go up as well.
For those who carry a balance, that means higher monthly minimums and higher interest charges.
How quickly will those higher minimums and interest rates hit you? That depends. Your card agreement will spell out how fast your interest rates will rise when the Fed acts. The timing varies among banks. Some card issuers will act superfast, others will grant customers a brief reprieve.
The Fed voted Wednesday to raise short-term interest rates by a quarter-point to a range of 0.75 percent to 1.00 percent, and Fed-watchers predict two more rate increases in 2017.
The Credit CARD Act of 2009 imposed restrictions on how card issuers could raise rates, but one of the still-allowable ways is when the card’s rate is tied to an index. If the index goes up, then the increase may be passed along to consumers. Since the federal law passed, card issuers switched en masse to variable rate cards tied to an index called the prime rate, and the prime rate moves in lockstep with the federal funds target rate that the Federal Reserve can change.
The question I wanted to answer is: How fast will it happen?
I reviewed credit card terms and conditions from the nation’s biggest credit card issuers and found some variation. Most issuers say their cardholders’ APRs will change with the start of their first billing period after the first of the month following the prime rate change. But Capital One says it only makes those types of changes quarterly, meaning that cardholders will get a brief reprieve. That reprieve isn’t going to be a huge deal for most folks, but a lower APR is a lower APR, even if it’s only for a few extra weeks or months.
Don’t expect to find information about these policies easily, though. While some issuers addressed prime rate changes in the terms and conditions pages on their website, making it easy for card applicants to find, others didn’t. Some issuers — including Citi, Chase and Bank of America — mentioned the information only in the full credit card agreement, which may or may not be easy to find when applying for a specific card.
Here’s a look at what I found in issuers’ terms and conditions:
The Starwood Preferred Guest Credit Card from American Express
When the Prime Rate changes, the resulting changes to variable APRs take effect as of the first day of the billing period.”
Barclaycard Arrival Plus World Elite MasterCard
“We use the highest Prime Rate listed in The Wall Street Journal on the last business day of each month…”
Wells Fargo Cash Back Visa Signature Card
“For each billing period we will use the U.S. Prime Rate, or the average of the U.S. Prime Rates if there is more than one, published in the Money Rates column of The Wall Street Journal three business days prior to your billing statement closing date.”
“We calculate variable rates based on the Prime Rate by using the highest U.S. Prime Rate listed in The Wall Street Journal on the last business day of the month.”
Capital One Quicksilver
“Your variable rates may change when the Prime rate changes. We calculate variable rates by adding a percentage to the Prime rate published in The Wall Street Journal on the 25th day of each month. If the Journal is not published on that day, then see the immediately preceding edition. Variable rates on the following segment(s) will be updated quarterly and will take effect on the first day of your January, April, July and October billing periods.”
Again, Citi, Chase and Bank of America don’t address the timing of the change in their cards’ terms and conditions on their websites. You have to dig out the information in the full card agreement — a far lengthier, far denser document.
Here’s what these issuers say:
Citi AAdvantage Platinum Select MasterCard
“If the U.S. Prime Rate changes, we’ll apply the new variable APR starting from the first day of the billing period when we take the U.S. Prime Rate from The Wall Street Journal.”
“Any new rate will be applied as of the first day of the billing cycle during which the Prime Rate has changed.”
And Bank of America provides just sample credit card agreements, because “final rate and fee information depends on your credit history, so your actual rates and terms will be found on your Credit Card Agreement.” Here’s what they say in their sample credit card agreement for a Bank of America Visa/MasterCard Preferred Gold-Platinum card: “An increase or decrease in the index will cause a corresponding increase or decrease in your variable rates on the first day of your billing cycle that begins in the same month in which the index is published.”
Clear as a bell, eh? Not even close.
So what should you do? Your best plan of action is to tackle any credit card debt you have, while you still have time to pay it off at a lower rate. If you have no balance, a higher rate is only a theoretical problem.
If you do carry a balance in this rate-hike era, the increases will happen without you having to do anything. It may happen more quickly or slowly, depending on which card you have, but it will happen.
Meanwhile, if you’d like some clarification on exactly how and when your bank will implement the increase, your best move would be to call your card issuer. That will likely be a whole lot easier than searching through a giant credit card agreement for language that probably won’t be easy to understand anyway.
See related: APRs on the rise as Fed steps up rate hikes