Prime Credit Cards: A Background of Prime Rates
Prime rate credit cards are usually variable interest cards that have increasing or decreasing percentages based on the current prime rate. This is the most common type of card issued today. If the current percentage increases, the interest percentage will also increase by the same proportion.
Some credit cards though, have a fixed low APR, and those are by far my favorite, as long as they don’t have other terms that are grossly unfair to the borrower, such as astronomical annual fees or hidden costs or terms that are unfavorable.
Now that credit card companies are subject to more stringent terms set forth by the government so as not to confuse or mislead the average consumer, a lot of the terms that used to appear in the finest of the fine print possible are now a little more clear and visible.
With the whole financial meltdown in the housing market, as well as a record number of people claiming bankruptcy, creditors have been targeted by regulators. The reason is that deceptive lending practices, as well as over-lending were found to be part of the culprit of the financial meltdown.
Of course, not every lender was guilty of this, but enough were to lend credence to the bevy of regulatory efforts that were set forth by the Fed in order to taper some of that predatory practice off and greatly discourage its use to get ahead.
Financial institutions apply rates that are higher. Interest charges below prime are not common but this type of card or loan can be located but with difficulty. The percentage is consistent therefore it is competitive for banks to use in order to determine the amount charged for commercial and non-commercial cards.
Based on information from the Wall Street Journal the current Prime Rate is 3.25% and has remained the same in order to help the ailing economy. This information is used by financial institutions operating in the United States to base loan and credit card interest on this information.
The percentages are determined by the Wall Street Journal using information received from 30 of the largest and well known banks in the U. S. The information is then published for use by banks and also individuals seeking loans or credit cards.
The charge is calculated based on a point system, usually 300 points which is equivalent to 3%. If the federal target is .10% then the percentage will be increased to 3.10%. The federal funds target is used for short term borrowing.
Banks use the federal fund charge and add a percentage to it in order to generate a profit margin. If the current percentage is 3.25, the banks could add 4% to make the credit card or loan interest 7.25%. Financial institutions borrow from the government at 3.25% and have a profit margin of 4%.
The risk level of the applicant will also play a part in the determination of the percentage the bank applies. A report containing past payment history and the amount of debt an applicant has is also reviewed when the percentage to be paid is calculated.
This rate is controlled by the by the FOMC (Federal Open Market Committee) operated by the federal government. The committee conducts eight discussions annually to determine if an increase or decrease to the federal target is required. The committee’s decision is based on the level of inflation, economic conditions, and recession and credit industry problems.
The 3.25% will remain intact at the federal fund target level of 0% – .25% based on the FOMC’s decision. On April 27, 2011, the next scheduled discussion this decision may change after reviewing various influencing factors such as inflation and economic standing.
The best source for information on changing borrowing percentages, the Wall Street Journal and Bankrate websites are good sources. Information includes the current percentage and also discount information. Information can also be obtained from the Federal Reserve site as well.