updated 6/30/2004 3:57:17 PM ET 2004-06-30T19:57:17

If you’ve been lulled into carrying large balances on your low-interest credit cards, prepare your wallet for a rude awakening.

Major Market Indices

At its meeting this week, the Federal Reserve raised interest rates by a quarter of a percentage point — the first of what is thought to be a series of gradual rate boosts.

While that’s good news for fixed-income investors, who will soon benefit from higher income payments, it could soon spell the end of good times for borrowers.

That’s because the cost of carrying credit-card debt will get more expensive as rates rise. Most credit cards are tied to the prime rate, which banks raise or lower in lockstep with the Fed’s moves.

In a rising rate environment, experts say it’s likely that more issuers will move to variable rates, since that structure is not only more profitable, but it also gives them the flexibility to protect their margins as their cost of funds increase.

For example, in its latest quarterly filing, MBNA Corp. said a 1 percentage point increase in interest rates in the next 12 months could reduce its projected net income by about $67 million.

The company said it could offset its costs by repricing fixed-rate credit card loans, but noted that there’s a lag of about 45 days between rate hikes and repricings.

Currently, about 41 percent of bank cards are variable-rate cards, while 59 percent are fixed, said Robert McKinley, chief executive of CardWeb.com.

As rates rise, that’s likely to shift to 70 percent variable and 30 percent fixed — a mix that was typical for most of the 1990s, he said.

When rates were falling in the past several years, many issuers began offering more fixed-rate cards.

That’s why it’s important to watch for any change in terms in your monthly statements.

In the meantime, take advantage of any fixed-rate offers that come your way, because you’re probably not going to see many of those offers in the future.

Given the breadth of card products that issuers offer, consumers probably won’t see an across-the-board rate change.

Rather, issuers are more likely to change segments of their portfolios or tweak rates on their new card offers.

Earlier this year, Discover Financial, a unit of Morgan Stanley, notified some of its Platinum card members that the standard annual percentage rate on purchases would be changed to a variable rate from a fixed rate, effective April 1.

The company said it periodically reviews customers’ accounts and, based on “several factors and credit attributes,” will raise and lower their interest rates.

Fixed rates are still offered on some of its Platinum and Classic cards, the company said.

Citigroup Inc.’s Citibank unit — which used to offer fixed purchase rates on certain credit cards — now only offers variable rates on purchases, with the exception of fixed promotional and introductory rates, the company said.

Meanwhile, some card issuers have changed the so-called punitive rates — rates that kick in if customers are late with their payments or overspend their accounts — on cards to variable from fixed.

Last July, for example, Bank One Corp. switched its penalty-rate structure on many of its cards to the prime rate plus 20.99 percent, from 24.99 percent, to bring its rates in line with market rates, the company said.

You’re also likely to see rate changes reflected in new card offers. “If you look at any of the new offers, it’s hard to find a ’go-to’ fixed rate anymore,” said McKinley, referring to the rate that kicks in after the teaser rates expire.

And just because you’ve got a fixed-rate card doesn’t mean you’re safe. Issuers can change or adjust rates with as little as 15 days notice.

Currently, average interest rates on variable-rate cards are 13.53 percent compared with average rates of 12.79 percent on fixed-rate cards, said Greg McBride, an analyst at Bankrate.com.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 3.79%
$30K home equity loan FICO 4.99%
$75K home equity loan FICO 4.69%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.83%
Cash Back Cards 17.80%
Rewards Cards 17.18%
Source: Bankrate.com