Credit card APRs rise despite Fed rate cuts
By Leslie McFadden • Bankrate.com

Not all cardholders are experiencing a reduction in their credit card interest rates.

Since most variable-rate credit cards are tied to the prime rate, which has decreased 2.25 percentage points to 6 percent since September, folks might expect their annual percentage rates to decline.

For variable-rate cardholders who have good, or prime, credit, that's likely the case. The group enjoying interest rate decreases are mainly people with FICO scores above 700. Riskier, or subprime, borrowers may instead face rate increases.

"In general, variable rates are falling because of the federal rate cuts," says Bill Hardekopf, CEO of LowCards.com. Other than Bank of America's and Capital One's recent moves to raise interest rates on some accounts, he cautions that there probably are a "whole bunch of individual cases where rates are increasing based on their credit risk."

In September, the week before the Federal Reserve began its rate-cutting streak, the average variable-rate credit card stood at 13.97 percent. Since then it has fallen 1.47 percentage points to 12.5 percent. (Check the latest rates for all types of loans on Bankrate's Interest Rate Roundup.)

Tightening the screws
Industry analysts say that as the subprime crisis trickles down to the credit card portfolios within financial institutions, some issuers may attempt to offset losses when re-evaluating their credit card accounts.

In terms of how they're dealing with existing lines of credit, "issuers are reacting to their situations very differently," says Bruce Cundiff, research director at Javelin Strategy & Research. Banks smarting from subprime losses may consider "tightening the screws" by not extending lines of credit or approving new accounts, while other financial institutions may have a better tolerance for risk, he says.

In January, Bank of America sent notices to some credit cardholders telling them that their rates would rise to as much as 28 percent, even though many of those cardholders claimed they had a good payment history with the bank.

Bank of America spokeswoman Betty Riess says the bank does periodically review individual accounts for credit risk. "When we review individual accounts for risk, we take into account a customer's performance with us, as well as external credit criteria -- such as taking out numerous loans, using substantially all the credit available to them or defaulting on loans to other lenders. In cases where we ultimately raise a customer's rate based on this analysis, we notify them in advance. They can then call or write us if they want to reject the new rate, and pay off the outstanding balance at the original rate," she says.

Rate adjustments affect only a minority of their cardholders, according to Riess. "In 2007, for example, nearly 94 percent of our credit card customers had the same or a lower rate at the end of the year than they did at the beginning of the year, including 26 percent with lower rates year-over-year," she says. "The 6 percent that had an increase in interest rates includes customers who had two late or over-limit defaults with us in a 12-month period as well as customers who were repriced based on risk."

Last August, Capital One raised the interest rates of some of its cardholders to as much as 28 percent, according to the Los Angeles Times.

Some individual cards have also seen rate increases. According to LowCards.com, the average variable rate on Chase Freedom cards rose 3 percentage points from 14.24 percent in September to 17.24 percent in January. The purchase APR on Blue from American Express went from 12.24 percent in September to 11.74 percent in October, but has climbed back to 12.24 percent. (For the lowest interest rates, check Bankrate's credit card search.)

In the U.K., Citibank-owned Internet bank Egg created outrage in February when it canceled 161,000 credit card accounts it deemed high risk. A week later Barclaycard canceled more than 1 million cards and reduced the credit limits on some existing accounts.