Despite yet another drop in federal interest rates and promises of rebates from an economic-stimulus package, things are looking dour for some consumers with high credit- card balances.
While experts rant about opportunities for refinancing mortgages, thousands of consumers are staring at big, fat interest-rate hikes that showed up just in time for the post-holiday trauma season.
Consumers are reporting significant rate increases on their credit cards, according to credit experts, though others predicted recent rate cuts by the Federal Reserve would spur a drop in variable-rate cards.
Some increases are for having missed or been late on a single payment — even by just a day. Others seem to be just because market conditions are unfavorable, which some card agreements allow.
“My guess is that the card companies that are part of the larger financial-service companies are feeling the pinch, and when one part is hurting, you can make it up in another part,” said Emily Davidson, a financial expert at and former credit educator at Trans Union. “Ultimately, it’s at the expense of consumers.”
A modest 12 percent rate on a credit card might not squeeze, but the payments can get earth-shaking if the rate doubles or, as sometimes happens, triples overnight.
Suddenly, any rebate checks consumers may see from a stimulus plan designed to generate spending and help the economy will likely go directly to pay down credit-card balances.
“I’ve heard anecdotes that folks will use the rebate to pay off debt, which is one reason why tax rebates are actually a less effective stimulus than direct spending such as infrastructure improvement,” said Jared Bernstein of the Economic Policy Institute in Washington, D.C. “My guess is that about one-half of the rebates actually end up boosting consumption, and of that, 10 percent leaks out on imports.”
Nevertheless, card holders who find themselves with high balances complain that companies such as Bank of America are slamming them with rate hikes that could make 2008 unbearable in a bear market.
“They really don’t have to justify it,” Davidson said of card companies. “There’s not a lot of oversight, and I’m hearing complaints of rates as high as 27 percent for those who used to be at 9 percent. Then have one default, and it goes up to 33 percent.”
Though the interest rates for about nine of every 10 credit cards are tied to the federal prime lending rate — cut by another 0.5 percentage points Wednesday — any reductions might be back by April, said Curtis Arnold at .
“The key in repricing their rates is the out issuers have called ‘general market conditions.’ If they are unfavorable — and that’s basically what we have today — they not only take away any reduction they gave today but tack on another 5 points,” Arnold said. “Nothing is stopping them because, quite literally, they’re holding all the cards.”
Card issuers such as Wells Fargo say rates are generally moving the way of the federal cuts.
“In general, they are headed downward,” said Cristie Drumm, spokeswoman for Wells Fargo in Colorado. “It really depends on the card holder’s circumstance.”
Regardless, Davidson said consumers unhappy with an interest-rate hike should not use the credit card.
“It’s their one opt-out,” Davidson said. “Once you use it, you’ve agreed to the new rate, even if you don’t carry any balance.”
Pay the balance down under the old rate, “then leave the card dormant,” she said. “Open another card with a better rate if you have the credit to do it.”
David Migoya: 303-954-1506 or dmigoya@denverpost.com
