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Did banks jump the gun on card rate hikes?

Fred Williams

My credit card bumped up my APR for December because of the rise in the prime rate on Dec. 17. It’s a variable rate card, like most bank-issued cards these days, so increases in the prime rate can be passed along automatically.

But just a minute — the APR went up for the entire December billing cycle, which started on Dec. 5. That’s 12 days before the prime rate went up. So any balance I was carrying is being charged higher interest for those 12 days. Ditto for any cash advance balance and transfer balance, which are also subject to the higher APR.

The card that hiked my rate was from Barclaycard US, but they’re not the only issuer with a reach-back APR, according to banks’ public terms and conditions. At least some cards from Chase, American Express and other major issuers set their rates according to the prime rate that’s in effect at or near the end of the monthly billing cycle.

The Credit CARD Act of 2009 restricted retroactive interest rate hikes. Generally, cards can’t raise your rate on an existing balance. There’s an exception for variable rate cards, which can raise their rates in step with a market index, such as the prime. The formula for my card’s APR equals prime plus a margin of 11.74 percent. So when the prime changes, my APR changes by the same amount.

But how is it OK to charge higher interest starting Dec. 5 for a prime rate increase that did not happen until Dec. 17?

I asked the U.S. Consumer Financial Protection Bureau, which referred me to the official regulatory interpretation of the law regarding rate hikes. That commentary talks about setting rates based on a market index in effect on the last day of a billing cycle. That’s the language that many card statements use.

However, that interpretation concerns setting the next period’s APR. In fact, the interpretation states that, if more than one market index rate was in effect during a period, the lender couldn’t cherry-pick the highest rate for that period. Instead, they should average the index rates in effect during the period when determining the APR.

The rate increase is only one-quarter of 1 percent, so it is easy to miss. Fortunately, Barclaycard included a prominent notice on my statement. If I had to figure it out by comparing the December statement with the November statement — well, I’d be writing about something else right now.

For the average person’s card balance of $5,200, the higher APR means an extra $1 a month in interest. That’s not an amount you’re likely to notice. Multiply that $1 by tens of millions of credit card holders, however, and the money begins to add up. And rates are expected to go up two or three more times this year.

This rate increase is the first of its kind in the U.S. credit card world. Until last month, the prime rate had not changed since 2008. That was before the Credit CARD Act curtailed rate hikes on an existing balance, and banks flocked to variable rates. This is their first time turning the variable rate dial — maybe they did it wrong.

Did you get charged a higher rate on your December credit card bill? We’d like to hear about it — use this link to tell us your story, send email, or comment at the end of the blog.

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