Card Issuers' Latest Trick: Rate Formula Swaps

As banks prepare to implement a new credit card law in February, cardholders might find themselves holding, well, different cards.

Credit-card issuers have been slowly switching their fixed-rate cards to variable-rate ones. The annual percentage rates on these cards are tied to (and thus fluctuate with) broader market interest rates. In June, Bank of America (BAC) and Chase (JPM) notified some cardholders that their rates were being converted, citing market conditions. Discover (DFS) made a similar move in March. And earlier this month, Arkansas-based Simmons First -- known for its low 7.25% fixed-rate card -- also changed its cards to charge interest using a variable rate.

Although the switch puts issuers in a better business position, it also enables them to skirt rules in the Credit CARD Act of 2009 that allow interest rate increases only on new purchases and require issuers to notify cardholders of rate changes 45 days in advance, says Dennis Moroney, a senior analyst for Tower Group, a financial services consulting firm that follows issuers’ business models. (For more on the reforms, click here.) The result: Your APR for old balances and new purchases is guaranteed to rise, as interest rates rebound from historic lows.

“I’m frankly surprised the legislation was written that way,” says Greg McBride, senior financial analyst for Bankrate.com. “It’s more than just a loophole -- it’s big enough to drive a truck through.”

Hunting for the rare fixed-rate card may prove fruitless. “Fixed-rate cards are a dying breed,” says Curtis Arnold, founder of credit-card comparison site CardRatings.com. Major issuers have stopped offering fixed-rate cards to new cardholders, and many smaller banks and credit unions are following suit. Variable-rate cards now dominate the market, accounting for roughly 90% of accounts, he says.

(If there’s any consolation, fixed-rate cards aren’t really fixed, as consumers have discovered in recent months. “It’s more of a marketing ploy than anything,” says Arnold.)

Although a variable-rate card offers less control, you can limit your risk by hunting for a small margin -- the fixed portion of the APR tied to a variable index (usually the Federal Reserve’s prime rate, currently 3.25%). If issuers want to increase that set portion of the APR, they will have to follow CARD Act protections regarding cardholder notification and rate-increase restrictions, McBride says.

Here’s a sampling of cards with low variable rates and manageable margins:

American Express Blue Cash

Rate Breakdown:
* 11.24% to 17.24% variable (prime plus 7.99% to 13.99%).
* 0% on purchases for up to 12 months. 2.99% on balance transfers for up to 12 months.

Rewards:
Earn up to 5% cash back on supermarket, gas station and drugstore purchases, and up to 1% cash back on all other purchases.

Citi Forward

Rate Breakdown:
* 14.24% variable (prime plus 10.99%). Cardholders can earn rate reductions totaling up to 2% (bringing the margin to 8.99%) by paying their bill on time.
* 0% on purchases and balance transfers for up to six months.

Rewards:
Earn five points per dollar spent on music, movies, books and restaurants. Earn another 100 points each month for paying on time and staying within your credit limit. 

Discover More

Rate Breakdown:
* 11.99% to 18.99% variable (Prime plus 8.74% to 15.74%).
* 0% on purchases until January 2010. 0% on balance transfers for the first six billing periods after opening an account.

Rewards:
Earn 5% cash back in rotating bonus categories, such as home improvement and gas. Earn 1% back on all other purchases.

Iberiabank Visa Classic

Rate Breakdown:
8.75% to 15.25% variable (prime plus 5.5% to 12%).

Rewards:
None.

PartnersFirst Cash Back Visa

Rate Breakdown:
* 10.24% to 16.24% variable (prime plus 6.99% to 12.99%).
* 0% for up to six months.

Rewards:
Earn 1% cash back on all purchases.

Simmons First Visa Platinum

Rate Breakdown:
7.25% variable (prime plus 4%).

Rewards:
None.