Personal Finance > Ask the Expert
With all the rate cuts, why is my credit card rate still so high?
September 20, 2001

By Walter Updegrave
graphic graphic
With all the rate cuts the Federal Reserve has made this year, why is my credit card rate still so high? Are the card companies just being greedy?

Credit card companies greedy? You must have a sick warped mind even to suggest such a thing.

Seriously, many credit card holders have been surprised at how the interest rates on their cards seems to avoid gravity. But the riddle is easily solved once you know more about the type of card you carry.

Some credit cards -- about 30 percent or so -- carry a fixed rate. The issuer sets whatever rate it likes -- 9, 12, 15, 20 percent, whatever -- and there it stays whether interest rates go up or down. If you have a fixed-rate card with a low rate, you don't mind it so much when interest rates are rising, since your rate remains the same. It's a different story, of course, when rates are falling, and everyone seems to be benefiting but you.

The remaining 70 percent or so of credit cards outstanding have variable rates. The rate charged by variable cards is typically nine to 12 percentage points or so above the prime rate. (The prime rate is the interest rate banks charge to their most credit-worthy customers.) When the Federal Reserve cuts the target level of the federal funds rate by, say, a half a percentage point as it did on Monday, the prime rate drops by the same amount. Thus, as a result of the Federal Reserve's eight interest-rate cuts so far this year, the prime rate dropped from 9.5 percent in January to 6 percent this week.

Ah, but just because you hold a variable-rate card doesn't mean you enjoy the full effect of the freefall in interest rates. Some card companies adjust their rates quarterly rather than monthly, which means it takes a while for the rate-cut to kick in. Other companies set floors or minimums below which their rates won't drop. Once your rate hits that floor, the rate you pay won't decline further even if Alan Greenspan and his crew down in Washington continue whacking down interest rates the rest of the year.

Now, whether high fixed credit card rates and restrictions that limit the drop in variable rates amounts to greed or good business practices depends on your point of view. If you're a card holder, you probably fall in with the "they're greedy" crowd. If you own stock in a firm that has a big credit-card business, you might consider practices that boost interest charges an astute and entirely legitimate way to fatten the company's bottom line.

Whatever your views, however, it's a good idea to call your card company and find out what kind of card you own and how the rate changes, if indeed it does at all. Once you've got the skinny on the plastic you own, you can then go to a website such as or to see if you can find a better deal -- unless, of course, you don't mind paying those greedy/astute card companies more than you absolutely have to.