It seems like a number of financial institutions are quietly changing the rules on their credit card accounts for millions of cardholders. Based on the new law — The Credit Card Accountability, Responsibility and Disclosure Act President Obama signed in May 2009 — at least two major lenders, JPMorgan Chase (JPM) and Bank of America (BAC), are switching their cards with fixed-rates to variable-rates.
Based on legislative and regulatory changes, financial institutions will be limited in their ability to re-price for risk. Recently, BAC sent out a letter to cardholders stating that as a result of a change in their business practices, the annual percentage rate (APR) for their credit card will use a variable rate formula based on the U.S. prime rate, and if the prime rate changes the APR on the card will change accordingly. BAC believes the change to a variable-rate from a fixed-rate will better allow the company to manage its business as market conditions change.
The provisions will be phased in between August 2009-February 2009. Congress passed the law to curb what some called abuses of cardholder by lender, to include (but not limited to) runaway interest rates and constantly changing terms.
So how is this law and its apparent loop-hole for financial institutions really benefiting the consumer? Consider this: if the U.S. economy experiences inflation and the U.S. Prime Rate is increased, variable rate credit cards will experience increased APR levels, which could in all likelihood result in consumers shutting down their spending, and send others into delinquency or default. Clearly, the intent of this law does not fully match its application.
Read the full analyst report on “JPM”
Read the full analyst report on “BAC”
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