As a person who operated as both a borrower for personal requirements and as a lender with underwriting experience, I’ve found that LIBOR’s whole concept never made sense to me. Top credit card lenders like American Express, Bank of America, Capital One, Chase, Citi, and Discover fill the borrowing needs for most Americans, and there are excellent options with community banks and credit unions.
Who needs High Street when you have Wall Street and the Federal Reserve, anyway?
I often scratched my head about why LIBOR entered the equation. That is no longer necessary, as LIBOR is now phasing out. LIBOR is the London Interbank Offered Rate. It is a standardized rate used for capital markets, which surveys more than 200 top banks in countries including England, Wales, the U.S., France, Canada, and Japan for an average. Forbes covers the demise of LIBOR in today’s read.
- For more than 40 years, the London Interbank Offered Rate—commonly known as Libor—has been a critical benchmark for setting the interest rates charged on adjustable-rate loans and various mortgages. Libor also plays a significant role in pricing debt issued by corporate borrowers.
- This critical measure for the global financial industry has been burdened by scandals and crises; however, other more up-to-date pricing mechanisms are currently replacing it.
Most U.S. credit cards peg interest rates to the Prime Rate. Your American Express Gold, Bank of America Cash Rewards, Capital One Quicksilver Chase Freedom, Citi Double Points, or Discover It probably disclose Prime Rate + “X” in the Schumer Box. The “X” is the spread added to the Prime Rate. It is simple to find since any change in Prime Rate is usually a news item, or my go-to site is here for comprehensive data back to 1983.
There are some consumer credit outliers. Citizens Bank is an example pulled from the CFPB Terms and Agreement site for the Cash Back Plus Cardholder Agreement.
- *Your APR for Purchases and Balances Transfers may vary monthly and will be reset on the first day of each billing cycle by adding the Index to a margin of 13.24% – 21.24% percentage points. The APR for Cash Advances is determined monthly by adding the Index to a margin of 21.74% percentage points. The Index is determined monthly. It is the three month LIBOR (London Interbank Offered Rate) published in the northeastern edition of The Wall Street Journal in its Money Rates table on the first day of the preceding month rounded up to the nearest one-quarter of a percentage point. If the first day of the prior month is not a business day, the Bank will use the three month LIBOR published on the next business day.
LIBOR will go away in late 2021; the Prime will be the consumer banking benchmark beacon. In the interim, if you’d like a good read on related scandals and how LIBOR helped cause the Great Recession, here is an excellent read by the Federal Reserve.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group