The LA Times’s Incomplete Swipe at Credit Cards

The LA Times columnist David Lazarus reports this morning that credit-card companies are doing an “end run” around impending regulation by changing the way they charge interest rates.

Lazarus finds Chase and Bank of America informing their customers that they will now be charged adjustable interest rates rather than fixed rates. That will allow them to raise rates as overall interest rates increase.

It’s unclear from the column whether the variable-rate thing is a loophole that will allow banks to adjust APRs willy-nilly like they do now or if it will only allow them to change as interest rates rise and fall.

If it’s a loophole, then it’s clearly a big problem that effectively kills the intent of the new legislation (which has already passed and is awaiting Obama’s signature).

If it’s just a matter of banks being able to float interest rates as they rise and fall—but not impose a unilateral 10 percent increase all at once—then the banks’ moves don’t seem so unreasonable. After all, if their cost of borrowing increases, under the new law they’d be effectively trapped if they’ve quoted a fixed rate to a customer.

The problem with Lazarus’s column is I can’t tell which it is. That’s an important piece of missing information.

There are other good things about it, though. Lazarus points out that this is not a one-off thing—banks are scrambling to make changes before the day of reckoning (the law’s effective date) comes:

In response, banks have scrambled in recent weeks to make changes to their card offerings before the new rules take effect. I wrote last week about how JPMorgan Chase is increasing its monthly minimum payment to 5% from 2% of the balance for about 1 million cardholders.

That kind of thing is precisely what prompted the legislation, as Lazarus wrote in a good column last week:

Burbank resident Shant Istamboulian, 29, said his mother recently received notice from Chase that her monthly minimum would rise to about $365 from $149.

“She’s barely making ends meet,” he said. “She charges groceries on her credit card. She pays her insurance with her credit card. This higher minimum payment will kill her.”

Chase is no stranger to angry customers. In January, the bank started charging cardholders a $10 monthly fee if they’d carried a balance for too long.

And in today’s column Lazarus is good to point out that the unintended consequences of the legislation will mean higher borrowing costs for many borrowers. He notes interest rates are near all-time lows and if they’re going anywhere it ain’t down. He writes about a woman who’s had a fixed 9.9 percent interest rate (still pretty high for a loan of any kind) for five years:

The Federal Reserve’s Federal Funds Target Rate, which is used by most banks as the benchmark for the prime rate, is now around 0.25%. Banks typically tack 3 percentage points to the Fed’s target rate, which is how we get the current prime rate of 3.25%.

As recently as August 2007, however, the Fed Funds Target Rate was 5.25%, which placed the prime rate above 8%.

Under BofA’s new formula, that would give cardholders like Afonina an interest rate of at least 15% for purchase balances and a hefty 30% for cash advances.

That stings, and I think it may seem to imply that BofA won’t be able to raise interest rates unilaterally beyond market fluctuations. The problem is, we can’t tell for sure from this column.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.