Cards switching users to variable rates

Some of the nation’s biggest credit card companies are switching customers from fixed to variable interest rates.

Bank of America, J.P. Morgan Chase & Co. and Discover acknowledge that they’re doing it.

But they won’t say how many customers they’re forcing to accept variable interest rates because it’s a potentially costly change for those cardholders.

About two out of every three credit cards already carry a variable rate, and issuers are clearly pushing to increase that percentage before the new law limiting their ability to raise fees and increase rates takes effect next February.

The Credit Card Accountability Responsibility and Disclosure Act is supposed to protect consumers from the industry’s worst abuses.

It requires cards to notify cardholders at lease 45 days in advance before raising interest rates on future purchases, up from 15 days right now.

The new law also makes it much harder for cards to raise rates on existing balances unless borrowers fall at least 60 days late with their payments.

The big exception is for variable rate cards.

The interest rate on those cards is determined by adding an established rate or margin, to a fluctuating index rate, usually the prime rate banks charge their best commercial customers.

If the index rate those cards use to determine the interest rate goes up, then the card’s interest rate can increase right along with it.

Bank of America, for example, sent an undisclosed number of customers a letter a letter in June, telling them that their accounts would switch to a variable interest rate effective with their August statement.

It says the change was calculated to avoid any immediate rate increase.

If, for example, a cardholder had a fixed rate of 13%, Bank of America revised that to a variable rate of prime plus whatever margin would bring the customer up to a variable rate that is currently around 13%.

But with the prime rate currently at 3.25%, it has only one way to go once the Federal Reserve stops pushing interest rates to artificially-low levels to fight the recession. And that is up.

Discover and J.P. Morgan Chase will allow customers to avoid the change by closing their accounts.

That allows cardholders to payoff any balance at the existing, fixed interest rate. But it means they can no longer use the card.

Bank of America will not. Even if you do close your Bank of America credit card account, unless you immediately pay off your balance in a lump sum, you’ll be charged the variable rate on any pre-existing balances.