Bank of America's Fine Print

Today I received a relatively thick envelope from Bank of America, as I'm sure many other people have or soon will. The terms of my BofA Credit Card (formerly an MBNA Credit Card) are changing at the start of next year, and Bank of America was notifying me of the changes as required by law.

Most people probably throw this stuff in the circular file or stick it in a drawer. If they are smart, at least they shred it (that's what my wife does) but very few actually read the 6pt legalese type. Not me. Like an archaeologist trying to translate ancient hieroglyphics, I study every letter of financial disclosures looking for a "Gotcha".

And there it was.

If you have watched the news lately, you know that chaos in the mortgage market and a so-called "credit crunch" has precipitated calls for a reduction in the Prime Rate. Most people don't doubt that Prime is going to drop, they just question how soon it is going to drop, and by how much. And that is why the new terms and conditions on my BofA struck me as interesting.

Adjustable interest rates are always based on some index (often Prime) plus (or minus) a margin. My Bank of America account is no different and is based, in part on the Prime Rate. To be more specific, in the past the interest rate on my account in a given month was based on what the Prime rate was at the end of the previous month. This is how the variable interest rates on credit cards, personal loans, and home equity lines of credit are almost always calculated.

Until now. Just as the Prime Rate is expected to drop, Bank of America wants to hold onto my money a little longer. Instead of basing my interest rate on the Prime rate at the end of the preceding month, the interest rate will now be based on the highest prime rate over the past three months. In effect, if Prime drops, my interest rate will not drop until nearly 4 months later. Meaning that I am effectively paying an increased interest rate anytime Prime drops for a period of no less than 3 months. Interesting.

I don't suppose its that big of a deal... just one more way the little guy is getting squeezed and the big corporation can find a way to charge you more that will be lost in the semantics. Considering I blame the big credit card companies, in part, on the reported foreclosure crisis currently before the country... this shouldn't be a surprise. More on that another time.

If you find new terms from a credit card company in your mailbox in the near future, you might want to pay close attention. You too might find a defacto interest rate increase hidden among the 6pt type.