Fixed-rate credit cards feel pinch of reforms

NEW YORK – It could be time to kiss fixed-rate credit cards goodbye.

Two of the biggest issuers in the nation – Bank of America and Chase – say they’re switching some fixed-rate cards to variable rates to manage costs in light of the sweeping new reforms to the credit card industry. The interest on variable-rate cards is tied to the rise and fall of the prime rate.

The changes will be effective starting in August for both banks. Discover Financial Services already moved some of its cardholders from fixed to variable rates in June.

The moves are the latest clampdown on cardholders over the past year. To prepare for a new law that will limit banks’ ability to change card terms, lenders have been raising interest rates, tightening credit limits and even closing inactive accounts.

Now banks say the switch to variable rates will further limit their risk under the new credit card law, which becomes effective in February.

“Variable rates reflect Chase’s changing costs for funding credit card loans. As a result, our customers may benefit from lower rates when the costs to Chase are decreased, or may experience higher rates as costs increase,” the bank said in a statement.

Chase and Bank of America wouldn’t give specifics on how many accounts the change will affect, but said they will continue to offer some fixed-rate cards. Chase has 159 million credit cards in the U.S. and Canada, while Bank of America has 70 million worldwide.

Variable-rate cards currently make up 66 percent of credit cards issued by the nation’s largest lenders, according to Bankrate.com.

Fixed-rate cards are generally reserved for the best customers. But despite the name, the terms on fixed-rate cards could always be changed in the past.

There’s another reason variable-rate cards work in lenders’ favor. Banks can set a “floor” in the fine print of a card agreement, meaning the customer’s interest rate won’t fall below a certain level regardless of how much the prime rate drops.

Jacobson would not comment on Chase’s policy on floors; Bank of America said it does not have floors on variable-rate cards.