A "fixed" rate might make you broke

Marketplace Staff Mar 23, 2007

TESS VIGELAND: A colleague shared a story week that we’re guessing will be familiar to a lot of you. Two years ago, he got a Capital One credit card. It promised a 4.9 percent fixed interest rate. Fixed. F-I-X-E-D. Recently, Capital One informed him the rate was jumping to 9.9 percent. He hasn’t made any late payments, no credit problems elsewhere, so what gives?

Well, we brought in Travis Plunkett of the Consumer Federation of America to explain. Travis, I looked up some definitions of the word “fixed” and fixed equals “Having a fixed and unchanging value, or incapable of being changed, or moved or undone.” I don’t think credit-issuers have that meaning in mind.

TRAVIS PLANKETT: Well clearly, Mr. Webster hadn’t read the Truth and Lending Act, because that says fixed only means the consumer gets 15 days’ notice if a change in terms occurs.

VIGELAND: Fifteen days?

PLUNKETT: That’s right. Now, many companies give you more notice if they’re gonna raise your fixed interest rate. But the law only requires 15 days.

VIGELAND: Then if you’re getting a credit card that says a fixed rate, you just have to know it’s really not fixed.

PLUNKETT: It’s really not fixed. Now, they can’t raise your rate just for you. But they can raise it for a class of card holders.

VIGELAND: Well, there’s been a lot of congressional interest in credit cards recently. Do you think that this behavior may be addressed as well?

PLUNKETT: Well this behavior is going to be looked at because it’s part of a larger problem. The credit card companies have given themselves the right, in their contracts – they’re called card-holder agreements. These are the things you get just after you get a credit card and you throw them out because you can’t understand it. In those cardholder agreements, the credit card companies typically give themselves the right to change your interest rate and your fees at any time for any reason. And that is a problem that has already been identified in congressional hearings and we’re hoping will be addressed.

VIGELAND: Well so, what are you supposed to do? You get all these credit card offers in the mail, and if you do decide to take a peak inside, what should you be looking for?

PLUNKETT: Well most people will look to make sure they’re not paying an annual fee, and they’ll look at that initial interest rate. The next thing they’ll look at is something most of us don’t want to think about, which is, what happens if you pay late? Nobody thinks they’re gonna pay late, everybody thinks they’re gonna be right on time and always pay their obligations perfectly. But that’s not the way it happens. So we encourage people to look at some of these penalty fees. If you think you might be taking out a cash advance, look at the higher interest rate there. If you think you might be going over the credit limit, look at the fees there. And certainly look at the late fees, that’s the fee that most people pay if they pay a fee at all.

VIGELAND: All right. Travis Plunkett is legislative director with the Consumer Federation of America. Thanks for coming in.

PLUNKETT: Nice to talk to you.

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