Wednesday, October 8, 2008

Does Your Credit Card Have an Interest Rate Floor?


With the Federal Reserve lowering interest rates today, I immediately said: Yes! That means my Nordstrom Visa Signature (link here) card will have a 4.5% interest rate (when Nordstrom re-rates my account in a couple of weeks). But then I recalled that Nordstrom also has a rate floor on my card -- meaning that at some point, my rate can go no lower. If you don't already know, you should check to see if your cards have a rate floor.

Nordstrom's rate floor is 4%. If things continue to stay awful here in the United States, and the Fed is forced to lower rates even farther, my Nordstrom card's interest rate will eventually stop going lower. For now, I welcome the 4.5% interest rate. (Since originally writing this story, Nordstrom has announced an interest rate hike that will apply to all of its customers (link here).)

But these rate floors are something to think about. Lower interest rates encourage more borrowing. But if your card has a rate floor, you'll eventually lose the incentive to borrow, even if the Fed took rates to 0% (don't think that can't happen).

I was going to write a full-blown story on the topic, but I see that Mainstreet.com has written a story on it today. As a result, it will be easier to simply read that story instead. Though the story looks at today's rate cut in general, and what it means for credit cards, it spends a lot of time talking about rate floors.

Here is the story: What the Rate Cut Means for Credit Cards (link here).

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15 comments:

HKbushido said...

say you have a 100k limit on your nordy cc. only way to lock that rate from going higher is to close the account, right?

so say they send you Bt checks. you can write one to yourself for 99k and close the account and just pay it over the years, right?

I've already figured out this is not suggested, It's just a hypothetical question.

GlobCredit.com said...

I have never seen a BT offer from Nordstrom, by the way. But anyhow, yes, if you had a balance, and wanted to lock that rate in, you would close it if you had a rate of 4.5%.

Hk, I imagine you could do that. But there is also a clause in most card agreements that your balance can be called and that its balance must be paid immediately. Your idea sounds like something that would trigger a "call."

Not something I would suggest, but, yes, you are correct. Your rate would be locked in -- provided you do not miss a payment, and provided that Nordstrom, or whoever, doesn't call your balance due and payable immediately.

Hkbushido said...

so this "call" feature, which part of the CC agreement is it in. Does penfed mention anything like this?

lupoman said...

I am interested in bank loans atm, in particular, car loans! What do you think Banks reaction to this will be?

GlobCredit.com said...

Hk, I would not be surprised if Penfed does. I have not looked at the agreement for some time and it's not readily available.

Also, there is also the terrible consequence of your utilization skyrocketing. When the card company closes the card with a balance, you look 100% utilized. Not something that I would want to deal with.

GlobCredit.com said...

Lupo, banks will likely move their prime rates down immediately. Prime will be 4.5%. Not sure what will happen with car loans.

Keep on the lookout for better rates. Penfed recently upped its car rates, so, as you can see, auto rates don't always follow prime.

Far Left Texas said...

I followed CM's advice and read my entire Chase agreement - I didn't see anything about them "calling" my balance.

My current BT offer is 0% until 8-09, then 5.99% until paid off. As long as I make at least the minimum payment on time, there's no way they can change that.

I wonder if today isn't a good day to ask WAMU to lower my 6.875% mortgage.

lupoman said...

Penfed is who i am most likely going through. I saw they raised their limits a couple of months ago. I am hoping they lower them with this decrease. Your thoughts?

GlobCredit.com said...

FLT, I am not at home right now. I could have sworn that my Merrill card has this feature. When I will get home, I will check some of my other cards as well.

GlobCredit.com said...

Lupo, wish I could help you, pal. Just no way to know if Penfed will be lowering its rates. And I don't even want to venture a guess. I would not have thought that they would have lifted rates recently -- and yet they did.

Far Left Texas said...

CM - after reading the "Read Your Agreements" blog posting you made way back when; I would have sworn you were the kind of guy who carried his CC agreements with him in a well organized file folder at all times.

My mental image is crushed.

GlobCredit.com said...

FLT, haha. Not quite. But I am pretty anal.

By the way, you see that story where I gave you a tip of the cap?

Mark said...

My Merril card I believe has this feature. As always read your card agreements especially in this market. Although I have had no CLDs I've had card companies holding transactions for more information.

GlobCredit.com said...

Mark, thanks for the comment. When I get home I will confirm that. I think you're right though. That was my recollection as well.

GlobCredit.com said...

Hey, I went back and looked at my Merrill agreement. Turns out that the debt can only be called immediately if you are in default. Otherwise, I do not see a clause that says your debt can be called for any reason at all.

I am sure that I have seen clauses that allow for immediate calls (outside of default), so I will check back in when I find one. Or, I might just be going crazy and I dreamed the whole thing up (probably in my sleep).

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