The Money Saving Fifty (50)

The Annual Percentage Rate (APR), is the interest rate placed on credit cards.  Lately, many banks have notified customers their APR will be increased March 1.  The reason stated for this increase is to “maintain profitability.”  You may have questions and need a more thorough explanation of the APR.

How does the APR affect your monthly bill? This depends in large part on the type of payment you make each month. For example, if you just pay the minimum amount due each month it can take years before you pay off the entire debt. Why? Take a look at your credit card statement.

How much is charged in interest? How much is taken off the principal amount? Let’s assume that you pay a minimum amount of $20.00 each month. If the APR is more than 15%, you will be paying off this debt for the next six years or more. Moreover, if you miss a payment the APR will increase.

Here is a sample of the changes that will be applied to owners of a Chase Visa:

On purchases, the APR will be the prime rate (which is based on the 4% Prime Rate on December 15 2008) plus 16.99%, giving a total of 20.99%. The same APR rate applies to balance transfers, balance transfer checks, cash advances, and cash advance checks.

Interestingly enough, these changes are being applied to good customers with a good credit standing and high FICO scores. Consider again the reason behind the increase: “The principal factor is to maintain profitability on an account.”

This is a contradiction in terms. When the banks received the bailout money from TARP, the lending process was to begin again by the banks. The truth of the matter is that the banks are not lending because they are holding on to the money to protect themselves against future foreclosures that can, in essence, render the banks insolvent.

Recently a U.S. Senator related that some banks are already insolvent, and the money they received is not being used as it was intended. The problem is that when the sub-prime mortgage crisis occurred, banks held these toxic mortgages.

The government has not purchased these toxic mortgages; instead it has decided to infuse money into the financial system to act as a catalyst to stimulate the economy. By not utilizing the funds as it was intended, the banks are not lending but are increasing credit card interest rates to consumers.

Therefore, if you receive a notice in the mail stating that your APR is going to increase, it would be a prudent course of action to contact the bank and ask to have the interest rate lowered.

Keep in mind, however, that the notice also allows you to advise the credit card company that you do not accept the terms of the new agreement and you have the option of closing your account. Whether or not this will affect your credit report standing and FICO score remains to be seen.