Why Your Credit-Card Rate Might Not Be Falling

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The prime rate looks set to keep falling following the Federal Reserve's latest rate cut. Since the consumer credit-card rates are in part measured by the prime rate, consumers might expect to see their rates fall as well.

But a number of common catches can keep your credit-card rate from falling with the prime rate.

Your credit card may have a "rate floor" that prevents your rate from falling below a certain level, your credit score may have changed causing your rate to skyrocket or your creditor may raise rates because of economic conditions.

About 90% of credit cards are variable rate, according to Curtis Arnold, founder of CardRatings.com. And most of these are tied to the prime rate as published in The Wall Street Journal plus a predetermined premium: a rate which has fallen three full percentage points since the Fed started slashing rates in September.

A rate floor is the minimum interest rate you'll pay, regardless of the prime rate. Say your rate floor is 10% and your premium above prime is 5%. If prime is 8% you'll be paying 13% interest. But if prime falls four percentage points, your rate will only fall three percentage points.

After you hit the floor, your rate stops falling.

So how do you find out if you have a rate floor before you hit it?

It's not always easy. Rate floors may not always be disclosed in credit card contracts, says Linda Sherry, Director of National Priorities at Consumer-Action.

But if your contract says the rate can fall "no lower than X%" then you're in luck: You're bank disclosed its rate floor.

If not -- or if you've lost the contract your bank sent you -- you can always try and call your bank and ask. Of course, you'll have to navigate an often unwieldy automated answering system and bank on the front-line representative giving you the correct information.

 Another catch -- which, of late, has been a lightening rod for Congressional ire -- is creditors' practice of raising cardholders' interest rates, even when they haven't made a late payment. Some creditors use credit scores to assess consumer risk. If your credit score falls, which could happen if you pay another bill late, if you take out additional credit lines or if your total debt comes closer to your credit limit, your interest rate can skyrocket.

After Congressional interest peaked, some creditors, including Citigroup's(C) Citi Cards and JPMorgan Chase(JPM), say they abandoned the practice. But other creditors continue to use credit scores in conjunction with other factors when determining your interest rate.

Some credit card contracts also reserve the right to use general economic conditions to increase interest rates. The Los Angeles Times reported last month that at least two major credit cards added language in the last year saying that cardholders' rates may rise due to "market conditions," a term that seems to be replacing a clause that allowed cardholders' rates to be jacked up "at any time for any reason."

So you may remain as creditworthy a cardholder as ever you were, but some creditors reserve the right to adjust rates because of market conditions -- an ambiguous term that could be interpreted to mean rates can go up if, say, a credit crunch or market downturn leads to increased write-offs.

Want to object to a rate hike?

If you go the legal route you'll face an uphill battle. The near ubiquitous arbitration clause means that you've likely signed away your right to a day in court. Instead, your case will likely be heard by someone hired by a private group chosen by the bank. And many don't allow class action suits -- so if you're being nickel and dimed, you'll have a hard time joining forces to get your money back, and legal fees may be more expensive than excess fees.

But you're not entirely helpless.

The first step is to know your rate. After the prime rate falls, double check your credit card company's math: Your monthly statement should state your premium, and the prime rate is published in The Wall Street Journal. Simply add your premium to the prime rate.

If the prime rate falls and yours didn't, contact your creditor to find out why. You may be able to negotiate a better rate.

Another option is close your account if your rate shoots up and your creditor is not willing to bargain. Often, if you object, the only option is to pay off the bill and close the account. For many consumers, this isn't much of an option: You might not have the funds lying about to pay off the credit card and getting a credit card with a better rate may be a challenge for borrowers with less-than-perfect credit.

The only completely safe way is to avoid getting over your head in credit card debt.

After all, points out Arnold of CardRatings.com: "The credit card industry is pretty unique because they literally hold all the cards."

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