Credit card rates: Nowhere to go but up

WASHINGTON (CNNMoney.com) -- For millions of credit card customers, here's the good news: As of Feb. 22, a new law will bar banks from a host of practices that consumer advocates have long blasted as unfair.

No more rate hikes based on, say, the late payment of a cell phone bill. No more increases on existing balances. And consumers will know how long it takes to pay off their balance when they make minimum payments.

But here's what the new law won't do: It won't prevent interest rates from going up for the vast majority of customers.

Even after Feb. 22, holders of so-called variable-rate cards can expect to see increases. Variable rates are based on the prime rate and meant to follow the rise and fall of that index.

The problem for consumers is that the prime rate is at 3.25%, an historic low. It will almost certainly go up, experts say. And so will credit card rates, which currently average 14.9%, according to the Federal Reserve.

"It does leave a lot of room for growth and prices will go up," said Joshua Frank, a senior analyst for the Center for Responsible Lending.

While most credit card holders already have variable-rate cards, banks have been busy these past few months making sure nearly all customers have those kinds of cards. In addition, some banks are setting a floor on certain accounts to prevent rates from sinking below a minimum level, according to a Pew Charitable Trusts study.

"The credit card reforms outlawed some seriously abusive practices, but the cards will still be loaded with other tricks and traps," said Harvard University professor Elizabeth Warren, an advocate for consumer financial protections.

Indeed, the expectation that interest rates will tick higher exemplifies the difficulty lawmakers faced when crafting the new rules: They wanted to protect consumers without killing credit availability at a time when bank loans are already choked.

Congressional aides and banking lobbyists say it's fair to allow rate hikes that aren't under the control of the bank but influenced by market pressures.

"These rates are tied to an objective index that is not controlled by the credit card company," said Scott Talbott, chief lobbyist for the Financial Services Roundtable, a bank lobbying group. "Any future rate changes are driven by changes in that objective index and not the industry."

The law's provisions tying variable-rate cards to the prime rate has prompted banks, including the two largest U.S. credit card issuers - Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) - to make sure most of their customers have credit cards with variable rates.

Industrywide, variable-credit cards accounted for 94% of all new credit cards offered between July and September, up from 67% of the same period in 2007, according to Mintel, a market research firm.

The banks acknowledge that the moves are in response to the new law, which will make it harder to raise interest rates on customers who fall behind.

"Pending regulations will limit our ability to price for risk and also limit our ability to make rate adjustments based on market fluctuations," said Gail Hurdis, spokeswoman for JPMorgan Chase. "As a result, it is necessary for us to move accounts ... to a variable rate now in order to mitigate against future losses and to properly reflect future changes in Chase's funding costs."

Bank of America has also moved some customers into variable rate cards, said Anne Pace, a Bank of America spokeswoman. She noted that these customers haven't seen rate hikes, since the prime rate hasn't changed in recent months.

Along with switching customers into variable-rate credit cards, some banks are setting floors to prevent rates from sinking below a certain level.

A recent Pew Charitable Trusts study found that more than a third of the largest card issuers had instituted minimum interest rates. In December 2008, only 10% of banks had such a floor.

The industry considers these minimum interest rates a way of accounting for the inherent risk in credit card lending.

But consumer groups say minimum interest rates undermine the law's intention to tie rates to the prime rate.

"They add these footnotes that your rate will never be less than 13.25%, that's where I see the problem as unfair," said Nick Bourke, co-author of the Pew Charitable Trusts credit card study. "Truly variable rates should go up and down with the market."

Pew is among several consumer groups and at least one key lawmaker that have taken their case to the Federal Reserve. The Fed is in charge of interpreting the new credit card laws and issuing rules that determine how the laws should be implemented.

The consumer advocates argue that banks should lose the law's provision allowing them to tie variable-card rates to prime.

"In my view, as one of the authors of the [new credit card laws], this type of interest rate does not and should not qualify under the exemption for variable interest rates," wrote Sen. Carl Levin, D-Mich., in a letter to the Fed.

The Fed has received the comments but hasn't given any indication of which way its leaning, advocates say.