Living with credit

Rates are going up, but not for cards

Fred Williams

Interest rates are rising for the first time in years, giving the financial world fits. Bond values are plunging and mortgage rates are ratcheting up. Federal Reserve honchos are giving interviews in a bid to calm things down.

Time to pay off that credit card balance?

Well, that is never a bad idea. But if your fear is that a sudden spike in credit card rates is coming soon, relax. Although long-term interest rates have shot up recently, the prime rate — the benchmark that triggers an increase in credit card rates — has not budged. And economists say it’s not likely to rise anytime soon. Rates are going up, but not for cards

“As a general rule the prime is tied to the federal funds rate,” said Keith Leggett, senior economist at the American Bankers Association. The federal funds rate, closely controlled by the Fed, is the rate on overnight loans that banks use to meet reserve requirements. The Fed has held this near zero since late 2008, and expects to hold that course until sometime in 2015.

The prime rate, which has frozen at 3.25 percent since 2009, is the banking industry’s benchmark. As long as the prime holds steady and card rates are tied to it, “credit card rates do not go up,” Leggett said.

What is happening now is a shift in long-term rates because of Fed policy separate from the federal funds rate. The Fed signaled it may slow its purchases of mortgage-backed bonds and Treasury bonds to a halt sometime around the middle of next year, from the current pace of $85 billion per month.

“I think if (bond market turmoil) continues there could be an impact” on consumer loan rates, said Scott Hoyt, senior director for consumer economics at Moody’s Analytics, “but I don’t think it will happen in the short term.”

Variable rate cards, the industry standard, almost universally peg their rates to the prime. The big issuers’ credit card agreements have similar language stating variable rates may change when the prime does. The timing of the adjustment may vary — coming in the next month, or the next quarter, for example. Now is a good time to keep an eye out for modifications in card agreements that speed up the rate adjustment, making it monthly instead of quarterly. This will benefit card issuers when rates do eventually start going up again.

Leggett of the bankers’ group called the recent upsurge in long-term rates an overreaction. Even when it begins to taper off its bond purchases, the Fed will be easing its foot off the accelerator, he said, not stepping on the brake.  After the bond purchases end, removing the special support for interest rates, short-term consumer loan rates will remain at relatively low levels, he said.

“We’re returning to normal and it’s not going to be a smooth process,” he said. “But I don’t think you’re going to see significantly higher rates.”

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