Interest rate cuts? Not on credit cards

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.

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