While it is very likely the Feds will raise rates by 50 basis points in the next two weeks, the impact will largely affect refinancing activity, home prices, and collateral performance in the mortgage sector. Credit card issuers, blessed with lower funding costs over the past three years, will largely have to absorb the first wave of increases, but will recoup the impact by passing the rate increases to consumers over the summer. Some issuers recently switched from fixed rates to variable rates in anticipation of the increases. Discover switched its standard purchase rate from a fixed 16.99% to prime +12.99%, effective April 1st. Effective June 1st, American Express changed its default interest rate from a fixed 23.99% to prime +21.99%. A handful of VISA and MasterCard issuers have rejiggered punitive interest rates from fixed to variable, and have adjusted the effective dates of the prime rate. MBNA recently noted in its SEC filings that a 100 basis point increase in interest rates could reduce net income by $67 million for the year. MBNA said it could offset its costs by raising interest rates for cardholders but the company noted there is a lag of about 45 days before rate hikes takes effect upon cardholders. Fitch said yesterday it remains cautious in its near-term outlook for subprime credit card ABS. Higher rates may put pressure on subprime borrowers to reload available credit lines undermining stable to improving collateral performance. Notwithstanding, Fitch believes excess spread levels in the credit card sector, can absorb higher rates, though a rate increase may cause some spread compression for some issuers in the subprime segment.
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