Banks to Reduce Credit Card Interest Rates

The credit card industry has been doing back flips to reach the good graces of the credit consumer. And they have made a step in the right direction.

Since the passage of the Credit CARD Act in 2009, banks have been losing money, and began to charge consumers for services that used to be free. Bank of America began charging credit card users a $59 annual fee, and Chase implemented a $5 ATM fee. Well, these same banks and others, under the guidance of the CARD Act are starting to do something that actually helps pack our wallets – welcome, a decrease in credit interest rates.

Last year, millions of consumers experienced credit card interest hikes, before the passage of the Credit CARD Act due to bank scandals, an unruly economy, and pending reforms. According to Federal Reserve, the average interest rate increased almost a full percent, from 13.57 percent in 2008 to 14.31 in 2009. estimates that between 91 million and 121 million credit cards experienced rate hikes during the recession.

A section of the Credit CARD Act requires credit card companies to review any rate hikes that happened since January 2009. The law explains that if a state’s interest rate was increased due to high credit risk or market conditions, those issues had to be reconsidered every six months. The law then demands that the rates be cut when credit risk declines and market conditions improve.

By law, once the rate has been lowered it can not be raised again, according to Ken Clayton, general counsel for card policy at the American Bankers Association. The law requires banks to warn customers about rate hikes 45 days in advance and limits increases on new purchases.

But any decrease in payment can mean big savings for the consumer. According to the average balance on a credit card at the end of 2010 was $4,965. At a 19 percent interest rate it would take 13 years, 9 months to pay it off. Interest would be $3,894. If interest rates were cut to even 16 percent it would only take 12 years, 5 months to pay off. Interest would drop to $2,906.

Millions will feel the reprieve. Bank of America said that it will reduce the interest rate on about 1 million of its cards, according to the Associated Press. JP Morgan Chase & Co. , Citigroup Inc., Capital One Financial Corp., Discover Financial Services and American Express haven’t revealed the number of cards affected, but all confirmed that some customers will receive lower rates. If all banks changed rates on 2% of their cards like Bank of America is doing, then over 10.5 million card will be affected.

Consumers will not only see the changes in their pockets, they will also see it on their bank statements. Consumers who saw hikes in interest rates during the recession due to poor payment histories and did not reconcile their debts, will not be eligible for the reducing interest rates.


Ally Bank Bows to FDIC, Slashes Rates

Should a well funded bank be able to set their own interest rates to attract new customers, or should they bend to the pressure from the Federal Deposit Insurance Corporation (FDIC) to lower interest rates? If you support the free market, your answer would probably be no. But that is what recently happened when the American Bankers Association (ABA) sent a formal letter of complaint on behalf of its members to the FDIC.

The complaint stated that Ally Bank was offering higher interest rates than its competitors, and that Ally Bank had plans to receive funds through the Treasury Liquidity Guarantee Program (TLGP).

The FDIC’s Temporary Liquidity Guarantee Program backs financial institutions and allows them to borrow money at near-Treasury rates in exchange for a fee. Because Ally has been approved to borrow money from the TLGP, some ABA members complained they were using the TLGP funds to attract new customers by offering higher interest rates that was reasonable in the current economic environment.

Should the FDIC control interest rates?

The government shouldn’t regulate every aspect of private industry, but the lines become less clear when there are government bailouts or even government ownership on the line. The FDIC responded to the ABA’s letter by sending a letter of their own to Ally Bank, essentially telling them to lower interest rates so long as they participate in the TLGP.

What does this mean for Ally Bank members?

Overall, not much will change except interest rates. Ally Bank accounts are still covered by the FDIC so there should be no problems with customer funds no longer being guaranteed, and there should be no other differences noted by customers. Unfortunately, it means that new customers who were lured by the promise of higher interest rates will see them fall a little bit – through no fault of Ally Bank. It’s just an unfortunate change of events from a customer perspective.


Why You Need a High Yield Savings Account

Everyone needs a High Yield Savings Account, everyone. If you are serious about growing your savings, then you need to put your money into a high yield savings account where compound interest can make your money grow. Here are the top reasons you need a high yield savings account.

Why you need a high yield savings account

Higher interest rates. Most brick and mortar banks offer laughable interest rates, sometimes as low as 0.20% for a standard savings account. The top high yield savings account rates are often 5-10 times higher than the national average. If you don’t have a high yield savings account, you are leaving money on the table.

High yield CD rates. The good thing about high yield savings accounts is that their high interest rates roll over into other banking features as well, including high CD rates. Here are the top high yield CD rates from nationally available banks.

Few fees. Most high yield savings accounts have little to no fees, and have low minimum balance requirements (most are as low as $1.00).

Best place to park emergency savings. Everyone needs an emergency savings account, and a high yield savings account is the best place to put your emergency savings account – that way you will earn more money from the interest of your deposits.

Earn more money while waiting to invest. I like to invest my money in the stock market and in other equities, but brokerage accounts don’t typically pay very good interest. While I’m waiting for the best deal, I like my cash to earn higher interest than what the best discount brokerages pay.

Make it automatic. The top high yield savings accounts allow customers to automate their savings through direct deposit, ACH transaction, automatic deposits, and other automatic transactions.

Online bill pay. Online bill pay is a free feature with almost every online high yield savings account. Online bill pay makes it easier to pay your bills on time and will save you time and money. Many brick and mortar banks charge for this feature.

Easy access to your money. Most high yield savings accounts offer ATM access at a wide variety of locations, and many offer free AM access. Most local banks have limited ATM locations and charge higher rates. If you need to transfer money, your cash is never more than a couple days away.

As you can see, there are plenty of reasons why you need a high yield savings account.

As a side note, I recommend doing your due diligence and researching banks before signing up for a new accounts. Read the fine print and be aware of any possible fees before opening a new high yield savings account.