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The Floor is the minimum
interest rate payable on an adjustable-rate
credit card, loan or mortgage. It's called the
floor because the interest rate can not drop
any lower than the floor during the contract
period. The reverse of the interest floor is the
interest rate "cap" or "ceiling" which is the
maximum interest rate that can be charged during
the contract period.
In today's economy there is often no limit to the
ceiling and the floor is rarely seen.
The floor creates an interesting problem for
credit card users. Most credit card issuers tie
their variable
interest rates to the Prime Interest Rate or
some other
index such as the LIBOR. This means that when
the index rises, the interest rates that consumers
pay rise along with them. However, the existence
of contracted floor rates means that credit card
issuers and lenders are not required to lower
their interest rates below the contracted floor
rate even if the Prime or LIBOR rate plummets.
This makes the existence of a floor a good thing
for creditors and a bad thing for the borrower.
Make sure you understand what the floor is for
your
variable rate credit card before you use it
the first time.
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