In mid-December last year, the Federal Reserve raised its Prime Rate from 3.25 percent to 3.5 percent. This was a widely anticipated change many financial institutions (FIs) have already responded to by raising their own interest rates.
Consumers and FIs alike can expect to hear more from the Fed in 2016. Already, the Fed is gearing up for additional Prime Rate increases, citing continued economic growth as a catalyst. Some analysts predict as many as four federal rate changes this year. In order to effectively respond to these changes, FIs should know, understand and remember the following six things:
- Who is affected by Prime Rate increases?
● Cardholders will get higher interest rates on any outstanding balances, if their FIs choose to increase their rates.
● FIs may have to pay more when borrowing money to support growth.
● The Government is impacted by any resulting economic changes such as slowdowns in spending or housing growth.
● The Economy may dictate future rate changes based on how it responds to current rate changes.
- What is a rate change?
A rate change can occur when the Prime Rate changes. As of Dec. 17, 2015, the new Prime Rate is 3.5 percent. FIs that have implemented variable annual percentage rates (APRs) will especially want to pay close attention to Prime Rate changes.
- When should an FI implement a rate change?
If a Prime Rate increase goes into effect, an FI is not required to update its interest rates accordingly. Not raising interest rates works to the cardholder’s advantage and is therefore an accepted practice. If, however, a Prime Rate decrease occurs, an FI must implement the change by the required date.
- Where do FIs need to disclose updated rates?
FIs should review any materials where they may have disclosed their current APRs. These materials may include applications, card carriers, cardholder agreements, welcome letters, websites and advertisements. FIs should also consider starting a list of published items listing current APRs to easily keep track of documents that may need to be updated after a rate change.
- Why would an FI need to disclose a rate change?
If an FI has disclosed variable APR pricing, and is following the terms published in its Cardholder Agreement, it is not required to disclose the change in advance. Cardholders with variable APRs anticipate rate changes and do not require advance notice or communications. If an FI has disclosed fixed APR pricing, it will need to notify cardholders of interest rate changes in advance.
- How should FIs disclose variable APRs?
In their application and solicitation information, FIs should disclose APRs with a “current as of date” statement and the date the information was printed. Following that statement, FIs should indicate the information is accurate “as of that date” and is “subject to change after that date.” FIs should also include contact information for the card issuer, in case consumers have questions.