Credit card firms try end run around new federal rules

In Afonina's case, her current 9.9% rate means the bank will initially charge a variable rate of 6.65 percentage points above the current prime rate of 3.25%, keeping her at 9.9% at least for August.

After that, watch out.

Chase is also swapping variable rates for cardholders' fixed rates.

Stephanie Jacobson, a Chase spokeswoman, confirmed that many cardholders were recently notified about the switch, but she declined to provide any details.

"Changing costs are requiring Chase to more closely examine the rates and terms we offer our customers," she said. "Variable rates reflect Chase's changing costs for funding credit card loans."

Jacobson noted that "customers may benefit from lower rates when the costs to Chase are decreased."

The problem with that notion is that those costs can only go up.

Short-term interest rates are at historically low levels. The Federal Reserve's Federal Funds Target Rate, which is used by most banks as the benchmark for the prime rate, is now around 0.25%. Banks typically tack 3 percentage points to the Fed's target rate, which is how we get the current prime rate of 3.25%.

As recently as August 2007, however, the Fed Funds Target Rate was 5.25%, which placed the prime rate above 8%.

Under BofA's new formula, that would give cardholders like Afonina an interest rate of at least 15% for purchase balances and a hefty 30% for cash advances.

Representatives of Wells Fargo, Citibank and American Express said each company had no plans at the moment to change fixed-rate accounts to variable accounts. But they didn't rule it out down the road.

"At present we're not doing it," said Marina Hoffmann, an AmEx spokeswoman. "We don't talk about changes we may or may not do in the future."

Banking industry insiders say the days of fixed-rate accounts are numbered because of the new requirements imposed by Congress.

For decades, banks have enjoyed being able to change rates and other conditions at any time for any reason. Now they'll have to work within strict guidelines and give 45 days' notice of any changes.

Among other rules, the new law requires that banks leave interest rates alone for the first year after a card is issued. The exception is if the card comes with a variable rate.

The law also prevents banks from raising rates on existing balances. That rule won't apply if you're already under a variable rate before the law takes effect.

Riess said BofA isn't entirely doing away with fixed rates. They will still be offered for many new accounts.

Of course, such teaser rates can and typically do disappear when the promotional period ends. Don't be surprised if you, like Afonina, then receive a letter saying your fixed-rate account will now fall under a variable rate.

Can you say bait and switch?

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David Lazarus' column runs Wednesdays and Sundays. Send your tips or feedback to david.lazarus@latimes.com.