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Floor |
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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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Credit Card Definitions > F - M > Floor
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