As you probably know, part of the new credit card regulations going into effect in February involve making it a wee bit tougher for banks to jerk up interest rates on cardholders.  Rates must remain stable for one year and consumers are supposed to get a 45-day warning prior to rate increases, giving them time to prepare or to cancel the accounts in question.

This part of the CARD Act only applies to cards with fixed interest rates.  That’s one reason why card issuers seem to be setting new land speed records as they increase rates before the new laws slow them down.  They’re doing something else, too…  They’re switching many existing fixed rate cards to work on a variable interest rate instead.

With a variable rate card, your interest fluctuates.  It’s set at a certain percentage mark above the prime rate.  If the prime goes up, your effective rate goes up.  If the prime drops, you pay a little less.  This is a good thing for the card companies because it insures them a margin regardless of what happens with the overall economy and the prime rate.  They know they’ll be making X% no matter what happens.

For consumers, it’s a little different.  As a few hundred thousand people who had adjustable rate mortgages can tell you, things get super messy when rates go up.  Plus, this is happening at a time where interest rates are low.  Consumers are far more likely to be on the receiving end of increases than decreases.  Additionally, the percentage over prime featured on these cards is still often quite hefty.  Eva Norlyk Smith outlined her situation at The Huffington Post:

Oh no. Just one more of those endless change-of-account-terms letters, which lately have landed in cardholders’ mailboxes at the same incessant rate as Victoria’s Secret catalogs (VS shoppers, you know what I mean).

But this time around it’s not just another boring announcement. In fact, the letter reads more like a page out of The Grinch Who Stole Christmas. In the letter, Ken Stork of Citibank’s South Dakota Customer Service Center informs me that effective November 30, Citibank, will increase the variable APR for purchases on my Advantage Citicard to 29.99% APR.

Wait, what? 29.99% used to be a default interest rate, reserved only for naughty cardholders, who had fallen behind on their credit card payments or in some other way invoked the ire of card issuers. And even though I, like most other Americans, have seen my credit card limits slashed and interest rates raised, a “modest” 19.99% so far has been the highest.

This whole maneuver is a way for card companies to make their last ditch efforts to hit cardholders with higher rates while simultaneously avoiding the 45-day warning requirement after February 2010 and it looks like it could really pack a punch with the most vulnerable.  Jamie Lau explains the way one non-partisan research firm looks at the situation:

Those most likely to be harmed by higher borrowing costs are consumers who are relying on their credit cards to carry them through the economic downturn. According to Demos, a nonpartisan research and advocacy organization, most low- and middle-income households with high debt-stress levels — the ratio of a family’s credit card debt to their annual income — use their credit cards to pay for unavoidable expenses, such as medical expenses or to cover household essentials after a job loss, not for discretionary items.

So, what should consumers do in response to this gambit?  They have at least three options available to them.  They can, of course, close the account (either paying off the balance and just calling it quits) or by shopping for favorable balance transfer terms elsewhere).  Some people have reported success by calling the card companies and demanding better terms, though that seems like a longshot these days.  Finally, consumer may want to look at getting a card from a credit union.

Credit unions are less apt to use variable rate arrangements and a notable industry consultant is recommending they stay on that path.  David Morrison at The Credit Union Times argues that CU’s can manage without putting the screws to customers and provides an explanation of Jack Brick’s advice to them:

Jack Brick, president of Jack Brick Associates, a credit union consultancy headquartered in East Lansing, Mich., observed that the drop in fixed rate cards among the large issuers can only help credit union card accounts to shine all the more.

“We know that fixed rate cards are, by far, more popular with members,” Brick asserted. “It’s just not clear to us why credit unions should rush to give them up.”