Federal Reserve Cuts Interest Rates, but a 'Floor' Lets Companies Keep Credit Card Interest High
freeisbest
ABC News
Interest rate cuts? Not on credit cards
As the Federal Reserve Cuts Interest Rates, a 'Floor' Keeps Credit
Card Companies From Following Along
By Kathy Chu, USA TODAY
Despite falling interest rates, a growing number of consumers
are paying the same -- or even more -- to borrow on their credit
cards.
The majority of credit cards on the market have variable, or floating,
rates. Theoretically, that means that as the Federal Reserve lowers
its federal funds rate -- the latest cut took place this month -- card
holders should also see their borrowing costs fall.
In reality, though, banks often set a "floor" that credit card rates
can't fall below, and in many cases, that floor has already been
reached, analysts say.
Wells Fargo, HSBC, Discover, SunTrust and National City have a floor
on at least some of their credit cards. Wachovia, meanwhile, limits
how far its penalty interest rate -- applied to consumers who pay late
twice in a row -- and cash advance rate can drop. But the bank imposes
no minimum interest rate on credit card purchases.
Others, including Bank of America, American Express and U.S. Bank, say
they have no floors on credit card rates. Chase and Citigroup,
meanwhile, declined to disclose whether they have this policy.
Imposing a floor on credit card rates allows the bank to "continue
lending even in challenging environments," says Todd Morgano, a
spokesman for National City.
But such interest rate restrictions mean that borrowers with good
credit may not see their rates fall below 10%, while those with bad
credit may not see rates lower than 20%, says Greg McBride, a senior
analyst at Bankrate.com.
Even without such policies, banks are historically slow to pass along
interest-rate reductions. Since August 2007, the Federal Reserve has
cut rates by 3.75 percentage points, but the average credit card rate
has fallen only 1.4 percentage points, to 13.9%, according to Justin
McHenry, research director at IndexCreditCards.com.
Issuers have also become more aggressive about tacking on fees and
raising borrowers' rates -- as high as 32% -- for the slightest
misstep, such as going over the limit or paying late.
Joseph Ridout, a spokesman for Consumer Action, an advocacy group,
believes the rate increases are banks' attempt to "make up" for
ballooning mortgage losses.
"Credit card issuers don't have to follow the same rules as other
lenders do," Ridout says. "They can really change terms of your
contract as they want."
Borrowers with good credit who aren't getting the benefits of interest-
rate reductions should consider changing lenders even though their
credit scores may temporarily drop, McBride says. "If you can find a
card that cuts your interest rate and helps you (with) debt reduction,
it's worth it," he notes.
__________
JonquilJan
they base their rates on LIBOR - the interst rate in LONDON banks. Ticks me
off.
JonquilJan
Learn something new every day
As long as you are learning, you are living
When you stop learning, you start dying
Rod Speed
> It isn't a 'floor' that is keeping my Credit Card APR high - it is because
> they base their rates on LIBOR - the interst rate in LONDON banks.
No it isnt LONDON banks.
> Ticks me off.
JonquilJan
Rod Speed <rod.sp...@gmail.com> wrote in message
news:6mkf6lF...@mid.individual.net...
Okay what is LIBOR then. I had a friend, who is a financial advisor,
research it for me. She printed out results from a Google search -
comparing LIBOR and Prime Rate. And it clearly identified LIBOR as from
London banks.
Rod Speed
> Rod Speed <rod.sp...@gmail.com> wrote
>> JonquilJan <war...@imcnet.net> wrote
>>> It isn't a 'floor' that is keeping my Credit Card APR high - it is because
>>> they base their rates on LIBOR - the interst rate in LONDON banks.
>> No it isnt LONDON banks.
>>> Ticks me off.
> Okay what is LIBOR then.
http://en.wikipedia.org/wiki/LIBOR
> I had a friend, who is a financial advisor, research it for me.
> She printed out results from a Google search - comparing
> LIBOR and Prime Rate. And it clearly identified LIBOR as
> from London banks.
It may well have had the word London in it, but it isnt London banks.
JonquilJan
and newsgroups - the web site address you posted is not available to me at
the moment. So could you please enlighten me as to what LIBOR is - if not
connected to London banks.
Rod Speed
> Rod Speed <rod.sp...@gmail.com> wrote
>> JonquilJan <war...@imcnet.net> wrote
>>> Rod Speed <rod.sp...@gmail.com> wrote
>>>> JonquilJan <war...@imcnet.net> wrote
>>>>> It isn't a 'floor' that is keeping my Credit Card APR high - it is because
>>>>> they base their rates on LIBOR - the interst rate in LONDON banks.
>>>> No it isnt LONDON banks.
>>>>> Ticks me off.
>>> Okay what is LIBOR then.
>> http://en.wikipedia.org/wiki/LIBOR
>>> I had a friend, who is a financial advisor, research it for me.
>>> She printed out results from a Google search - comparing
>>> LIBOR and Prime Rate. And it clearly identified LIBOR as
>>> from London banks.
>> It may well have had the word London in it, but it isnt London banks.
> I have computer problems and cannot access any web sites - can get my
> email and newsgroups - the web site address you posted is not
> available to me at the moment. So could you please enlighten me as
> to what LIBOR is - if not connected to London banks.
That site says
The London Interbank Offered Rate (or LIBOR, pronounced /'la?b?r/) is a daily reference rate based on the interest rates
at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market).
LIBOR will be slightly higher than the London Interbank Bid Rate (LIBID), the rate at which banks are prepared to accept
deposits. It is roughly comparable to the U.S. Federal funds rate.
JonquilJan
from the financial advisor. I just don't understand why my CC company uses
that instead of Prime Rate. Well maybe I do - LIBOR is usually higher - and
more volitle - Prime Rate went down - and LIBOR (supposedly) went up. The
person I talked to at the CC company (AT&T) hadn;t a clue - I could tell she
was reading from a copy when she was talking to me.
Just can't seem to get ahead. Perhaps it's the necessity of replacing a car
before I planned - and the heating costs for this winter.
Rod Speed
>>>>>>> Ticks me off.
>>>> http://en.wikipedia.org/wiki/LIBOR
>> That site says
Because the interbank market is the source of their funds, not deposits.
> Well maybe I do - LIBOR is usually higher - and more volitle
> - Prime Rate went down - and LIBOR (supposedly) went up.
No supposedly about it. The LIBOR went up because so many
banks were going down or were being bailed out by the govt,
so they were reluctant to lend to other banks, because they
couldnt be sure which ones were about to go down next.
> The person I talked to at the CC company (AT&T) hadn;t a clue
> - I could tell she was reading from a copy when she was talking to me.
Yeah, that level of droid doesnt have a clue about where the operation
they work for gets the money they lend out on credit cards.
> Just can't seem to get ahead.
And that problem is only going to get worse while ever the Libor keeps spiking.
Lou
"JonquilJan" <war...@imcnet.net> wrote in message
news:4905e877$0$7498$38ce...@news.westelcom.com...
(snipped)
> Thanks Ron. Yes that is the information I also received on the printout
> from the financial advisor. I just don't understand why my CC company
uses
> that instead of Prime Rate. Well maybe I do - LIBOR is usually higher -
and
> more volitle - Prime Rate went down - and LIBOR (supposedly) went up.
Whatever's been happening recently is highly unusual, and I'd suggest both
not jumping to conclusions and putting the cyncism aside unless there's a
sound reason for it. For instance in January of this year the prime rate
was 6.50%, while the LIBOR 12-month rate was 3.445%. In March, the numbers
were 5.25% and 2.5133% and again, the prime was the higher of the two.
This isn't all that unusal - the prime tends to be 2.5% to 3.5% above the
LIBOR. Of the two, the prime tends to be more volatile - the prime lags
decreases in bank cost of capital but immediately reflects increases.
Historically, the spread between the two has been increasing, so over the
long term a loan based on the LIBOR will be less expensive than one based on
the prime (if the margin - the premium over the index - is the same).
(Source: - http://www.finaid.org/loans/prime_libor.phtml )
As to why a bank would base it's credit card rates on the LIBOR, my guess is
that the LIBOR reflects the market price for money, while the prime reflects
the Federal Reserve's Federal Funds Target Rate.
Concerning volatility, the federal funds target rate is usually reviewed
every six weeks, while the LIBOR is published daily. But small jiggles in
the daily rate don't fall into the definition of volatility in my book - the
price of every commodity fluctuates daily, even hourly, depending on a host
of factors.
JonquilJan
Well I'm totally confused now. The question came up for me when I got my
last CC statement. I keep track of the APR rates charged and notice that it
had gone up from the last statement - not much but up. And I knew Prime
Rate had dropped. I called the CC company and was then told that APR was
based on LIBOR and not Prime Rate. From there on I have just been trying to
gather information, And am about to throw up my hands about the whole
thing.
tarja....@gmail.com
> Lou <lpog...@hotmail.com> wrote in messagenews:ge5mfm$gm7$1...@aioe.org...
>
> - Show quoted text -
i am really trying to understand all of what is going on...i looked up
LIBOR today, because, for about 2 years i heard nothing about this
acronym(?)...abbreviation when i was growing up!!...all of a sudden,
LIBOR is everywhere, as if we should have known!!!....now, it is
connected to everything...God!! them there Britts...the Empire is not
dead after all!! - that there is very scary...are we going to have to
dump more Tea in Boston Harbour????....kind of quietly
humourous????...
Lou
I don't see how it matters. It's common for variable rate loan (which is
what a credit card is, after all) rates to be based on some index plus a
premium. Whatever index is used, it's beyond your control. Generally, it's
beyond the issuer's control as well. Whether the base index is higher or
lower than the prime doesn't much matter either - the cost to the borrower
can end up being the pretty much the same simply because the premium above
the index can be different.
You can't control the interest **rate** on your credit cards beyond
searching out the best deal for you among the plethora of offers out there.
The best you can do is to try and control the interest you actually pay -
the less you borrow, the sooner you pay it back, the less you'll pay in
interest. Normally, I feel that interest is a reasonable expense to pay -
it lets us have the use of whatever it is sooner rather than later. But
that assumes reasonably settled times and reasonable self-restraint on the
part of the borrower. Times are rather unsettled at the moment.