A Sneaky Way To Hike Your Credit Card Interest Rate

(MoneyWatch)  Credit reform isn't stopping--and may be accelerating--a little known practice that could hike your interest charges on a variable-rate credit card, according to the Center for Responsible Lending.

The practice, that CRL calls "pick-a-rate" involves variable rate credit cards that are tied to prime rate. Most people think that this causes the interest rate on their card to fall when prime rate falls and rise when it rises. But an increasing number of credit card companies peg your variable rate to the highest prime rate published within a 90 day window, said Josh Frank, a CRL researcher who recently published a study called "Dodging Reform: As Some Credit Card Abuses are Outlawed, New Ones Proliferate."

What does that mean? Your rate would rise within 30 days of prime going up, but if interest rates were declining, it would take much longer before you reaped the benefit. In effect, this gives the bank the ability to charge you the higher rate for an extra 60 to 90 days.

Nessa Feddis, a spokeswoman for the American Banker's Association, said that the practice would only cause nickel and dime charges--perhaps $6 a year for somebody carries a $2,000 balance. She could not say how rare or widespread the practice.

Bill Hardekopf, president of LowCards.com said that USBank participates in this practice and others may too. Bank of America says some of its cards also have this interest calculation method, but the bank is changing it to the method that sets the interest rate based on prime on the final business day of the month.

The consumer group estimated that 117 million customer accounts are affected by "pick-a-rate" pricing already and that more will follow. It may be small amounts, but in a volatile rate environment, the costs could mount. The consumer group believes that the practice now costs card holders about $720 million annually and could cost as much as $2.5 billion if the practice becomes an industry standard.

Notably, it's not a provision that you'd naturally notice in your credit card agreement, Frank said. Every credit card solicitation must include a large-print chart that shows the rates and fees applied to the card. In this case, the card issuer would disclose that your rate would be tied to prime, plus (say) 9 or 10 percentage points. The agreement's fine-print "footnotes" explain the calculation method. The wording change that allows this practice is so subtle that most consumers wouldn't catch it, he said.

Specifically, wording that used to say that the prime index rate would be based on "the maximum prime rate on the last day of the billing cycle" will now read that it will be based on "the maximum prime rate reported in the 90 days proceeding the last day of the billing cycle."

"The Credit Card Act that Congress passed earlier this year was a big improvement for American families," said Frank. "But our research shows that industry keeps finding clever ways to get around meaningful reform."

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