The Big Switch: Fixed to variable rates

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

Bank of America, JPMorgan 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, a potentially costly change for those cardholders.

Credit card companies are doing this because they don't like a new law that takes effect early next year and will limit their ability to raise fees and increase interest rates.

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

It requires companies to notify cardholders at least 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 behind on their payments.

The big exception is for variable rates.

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 goes up, the card's interest rate can increase right along with it.

About two out of every three credit cards already carry a variable rate, and the banks are making a big push to increase that percentage before the new law takes effect next February.

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

Spokeswoman Betty Riess 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.

The banks usually insist that a growing number of defaults caused by the recession are behind the recent spate of fee and interest rate hikes, not the pending law.

But that's hard to believe given the threats they made to raise rates and fees if Congress tried to help consumers by passing the new credit card law.

Discover spokesman Matt Towson was straightforward about why Discover is moving customers to variable-rate cards.

We "rebalanced the portfolio due to the increased costs of doing business in this economy and in response to federal rules and legislation limiting the ability to adjust rates in the future," he said.

Discover and JPMorgan Chase will allow customers to avoid the change by closing their accounts.

That allows cardholders to pay off 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.

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