Credit unions around the country that issue fixed-rate credit cards have to decide whether to stick with those cards or follow much of the rest of the card issuing industry and switch to variable-rate cards.

No one can say for sure exactly how many of the nation's roughly 4,000 card-issuing credit unions issue primarily or only fixed-rate credit cards. But, according to executives with credit card processors, a majority of card-issuing credit unions have at least one fixed-rate card, citing the popularity of fixed-rate cards with consumers.

Fixed-rate cards have also been popular with credit unions, particularly during times of low, stable interest rates when the cards provide a fixed spread of profitability, the executives said. But that profitability has been put at risk because of changes mandated in the most recent credit card law and that cast doubt on the future of some fixed-rate cards, they added.

“I think it's safe to say that many credit unions that issue fixed-rate cards would not change them if it were not for the increased risk posed by changes in the new law,” observed Glenn Schechter, director of card services for PSCU Financial Services.

The Credit Card Act of 2009 mandated many different changes for credit card issuers across the country, most of which consumers have cheered, executives noted. But they explained that the act's crackdown on a highly controversial practice of generally larger credit card issuers is what has made fixed-rate cards significantly riskier to issue.

Prior to the act, credit card issuers could raise the interest rates on cards, whether fixed or variable, by any amount they chose and for any reason. Such interest rate hikes usually covered both existing and new balances, but competition generally kept the activity restricted to larger issuers; credit union issuers would rarely raise rates at all.

But the economic downturn led more of the major issuers to hike their rates, which in turn led to many consumer complaints and swift passage of the new law.

The credit card bill addresses the rate question by preventing credit card issuers from raising rates on existing balances for fixed-rate cards except in some very specific circumstances. This new risk, losses due to interest rate changes without the ability to adapt, could turn issuers away from fixed-rate cards, the executives explained.

For example, if a credit card is issued at a fixed rate of 8.99% and the cardholder carries a balance of $10,000, Jeff Russell, CEO of TMG Financial Services explained, as long as rates are low for the credit union, it stands to make a profit. But if the cost of funds starts to rise and it can't raise the rate on that card's existing balance, the CU could be in a position where they are losing a good deal of money, he said.

With variable-rate cards, the act allows card issuers to raise interest rates on both old and new balances, provided they tie interest rates to an external rate, such as Libor.

This basic calculation, analysts and executives said, has led many of the larger credit card issuers to announce they are moving their fixed-rate cards to variable. Such cards will likely be less popular with consumers because they lack the stability of the fixed-rate cards, but they will also limit the risk of the issuers. In the last two weeks, both JP Morgan Chase and Bank of America have announced they are replacing fixed-rate cards with variable ones, and other major issuers have signaled they will do the same, industry analysts stated.

But will credit unions follow suit? “It's really difficult to put the question in a simple yes or no way,” explained Schechter. “A credit union needs to look at a lot of things to decide how much risk they will be able to take, how their portfolio's expenses are structured and what their members want. I am not saying credit unions should all make the same decision, but if they decide to keep their fixed-rate cards or switch, they need to know what they are doing and what their risks are.”

One of the advantages of keeping a fixed rate, albeit perhaps higher than many current rates, is the differentiation it could offer a card program. Credit union cards already enjoy a reputation for being good deals for consumers, and some credit unions may opt for keeping their fixed-rate cards, the executives said.

Or, in another option, Mitch Raymond, TNB Card Services senior vice president for products said he would not be surprised if some credit unions changed to variable-rate cards but had enough of an interest rate cushion they could keep the effective rate for their fixed rate cards unchanged-at least for a while.

“Just because you switch to a variable-rate card, you don't have to change the rate the same day,” he noted. “You can take some time to let cardholder's get used to the idea.”

Raymond observed that credit union cards may stand out in the future if they are able to keep their interest rates relatively low as rates for consumer credit overall increase. Since many in the financial services industry perceive the new law as limiting their ability to price for risk, the only recourse will be to accommodate that in the general cost of credit, he argued.

Card Services for Credit Unions said its credit unions are considering a change. “Overall, we have not seen a significant shift away from fixed rates to variable rates; however, we have heard from a few of our member credit unions that they are investigating the idea due to the added marketability that variable rates offer in these times,” said Bill Lehman, vice president of portfolio consulting services for CSCU.

But Ondine Irving, founder of Card Analysis Solutions, said she had been counseling credit unions to pay particular attention to card fee income, which the CARD Act will sharply reduce. Of particular concern may be over-the-limit fees that card issuers levy. The act significantly reduces this fee opportunity, and Irving said this may leave some credit unions with a gaping hole in the bottom line of their card programs that needs to be closed.

Irving and the card executives speculated that many credit union fixed-rate cards are likely to go away in the next 18 months.

“There are so many changes in the new act and so many of them are going to impact how cards are marketed and managed that I think we still haven't quite seen what the card industry is going to look like,” Russell said.

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