Most big banks started charging higher interest rates on credit card balances days before — or weeks before — the prime rate increased on Dec. 17, 2015.
The prime rate increase was the justification for the higher card rates. So is it OK that consumers’ APRs went up before the prime rate did? After all, the Credit CARD Act of 2009 set out to ban retroactive rate increases.
The card issuers who responded to this question just explained that they have variable rate cards, and pointed at the cards’ terms and conditions.
The terms for most big, general-purpose cards say that variable rates for a billing cycle are pegged to the prime rate on the last day of that cycle, or the last day of the calendar month, or a day or two before the last day.
This means the higher rate will apply to the entire cycle, at least some of which predates the increase in the prime. For example, Bank of America cited a card agreement saying that its variable rates are set according to the prime rate published in the Wall Street Journal “on the last publication day of each month.”
Capital One was the only exception that I found. It waits until the billing period after the prime rate changes to start charging the higher rate. Capital One also happens to be one of the major card issuers that is not shielded from class-action lawsuits by a mandatory arbitration clause.
What do regulators think?
The U.S. Consumer Financial Protection Bureau said it is “looking carefully at issuer practices in this area.” The emailed statement also said they “encourage consumers to review their credit card agreements or contact their bank to understand how their financial institution may be adjusting interest rates on their accounts.” So it sounds like consumers are on their own, for now.
What do legal experts think?
Alan Kaplinsky, a lawyer and an authority on card agreements, said there is nothing in credit card rules that prevents issuers from applying a rate increase to the entire billing cycle, “including balances which predate the increase in the index.” (The index is the prime rate, in practice.) Regulatory advice about variable rates does discuss using an index on the last day of a cycle to set the rate for the following cycle. But that example — which isn’t about the timing of increases — doesn’t forbid applying the rate hike to the current cycle instead, he said.
What do consumer advocates think?
Chi Chi Wu, staff attorney at the National Consumer Law Center, said she hadn’t looked into the law enough to comment definitively on the question. But she added that the timing of rate increases amounts to small potatoes compared to other credit card issues. Gotcha practices with deferred interest promotions, for example, can result in big surprise costs for months of built-up interest.
What do I think? For an average credit card balance of about $5,200, an extra month of interest at 0.25 percent is about $1. There’s not much money involved — but why should it go to banks, instead of staying in cardholders’ pockets? The people who carry a balance on their cards are probably not people with spare cash to throw around.
When rates come back down, cardholders will benefit — if banks don’t change their terms by then. Lower rates at the end of the month or billing cycle will apply for the entire period. But there could be a long wait for that payback. Bank economists on the American Bankers Association’s Economic Advisory Committee expect three rate increases this year, and further increases beyond that.
Whenever rates do come down, it will be a different group of people who benefit than the people who paid, a little early, for higher rates on the way up.