Rates are on the rise, which means you might have recently noticed that your credit card interest rate went up. If not, an increase could soon be on the horizon.
“With the Federal Reserve’s third interest rate increase this year, credit card rates are expected to increase,” says Samuel Deane, financial advisor, entrepreneur and founding partner of Deane Financial Partners in New York City. However, the Fed’s actions aren’t the only factors that can cause your credit card rate to go up.
If you experience an increase, it’s important to take action so you don’t end up racking up more credit card debt. Here’s why your credit card interest rate can increase and what to do about it.
Reasons Your Credit Card Interest Rate Could Increase
Hope4USA credit blogger Michelle Black, who has written about the subject for more than 16 years, says the Credit Card Accountability Responsibility and Disclosure Act of 2009 changed some of the circumstances in which card issuers may alter your interest rates. “However, there are still a number of conditions under which your card issuer is completely within its rights to bump your interest rate upwards,” Black says.
[Read: Best Low-Interest Credit Cards.]
Here are some of the common reasons credit card rates increase:
The index rate changed. Credit card issuers often use benchmark interest rates, including the prime rate, to set their card rates. Benchmark interest rates such as the prime rate are generally tied to the federal funds rate — a key gauge for short-term interest rates.
The prime rate rises and falls based on decisions the Federal Reserve makes, Deane says. “Most credit cards have a variable APR, meaning that the interest rate on the card is tied to the direction of interest rates in general. So if the prime rate rises, the interest rate on your credit card will rise too,” he says.
The Fed has raised the rate eight times since late 2015. Interest rates on financial products across the board have also begun ticking upward. If your credit card rate recently went up, this is likely the reason.
The promotional rate ended. Another reason your credit card rate can increase is that you reached the end of a promotional period. For instance, you might have received a balance transfer offer that promised a zero percent APR for the first 18 months. Once those 18 months are up, your interest rate will automatically reset to the regular APR you agreed to in your card agreement.
The issuer performed a periodic review. Credit card companies periodically review your financial status and make changes to your account if necessary.
“The issuer is often checking on your standing and will react to negative changes,” says Leslie Tayne, a debt resolution attorney and founder and managing director of Tayne Law Group. “If your credit score has dipped significantly since you opened the card, the issuer might raise your rate.”
The good news is that your card issuer is required to give you 45 days’ notice of the change, and the higher rate will only apply to new purchases, not your outstanding balance, Tayne says. Issuers must review your credit again in six months; if your score goes up, the issuer may lower your rate.
You missed your payments. If you failed to make your most recent credit card payments by the due date, you’ll likely be hit with a penalty. Many credit cards will charge a higher interest rate if you become 60 days delinquent on payments. The penalty APR that may apply after you’re 60 days late can be as high as 29.99 percent. Unlike rate increases that result from periodic reviews, the penalty rate applies to outstanding balances as well as future purchases. Plus, Tayne says, you’ll incur late fees and a hit to your credit.
Just because. Finally, credit card companies may periodically raise interest rates on credit cards for no particular reason. According to the CARD Act, they’re not allowed to do so if you’ve had the card for less than a year; the only exceptions are if you are at least 60 days delinquent on payments or the prime rate increases. “Legally, they don’t even have to have a specific reason for the increase as long as the account meets the 12-month criteria and a notice is provided,” Black says. To raise your rate, the issuer must provide 45 days’ notice.
[Read: Best Balance Transfer Credit Cards.]
What to Do If Your Credit Card Rate Increases
If your credit card rate jumps, there are steps you can take to avoid paying more.
Pay the full balance. One of the best ways to avoid paying credit card interest is to pay off the entire balance each month. If you always pay the balance, then the APR is irrelevant. “If you’re paying your balance in full every month — and therefore not paying interest — you probably won’t even notice the change,” Deane says. To ensure you can pay the balance in full, it’s important to charge no more than you can afford to spend each month. A budgeting tool can help you determine what your monthly spending should be in relation to your income.
Negotiate. Of course, paying off the whole balance every month isn’t a realistic option for everyone. In this case, “You may wish to call your issuer to check why your rate has been raised. You may be able to negotiate with your issuer,” Tayne says.
Sometimes it’s as easy as calling your credit card company and asking for a lower rate, according to Tayne. “Inform your credit card company that you have been exploring lower interest rate credit cards, and that as a good customer, they should lower your rate,” she says. However, this only works if you have, in fact, been a good customer — meaning you always pay your bill on time and avoid running up a large revolving balance.
Even if you’ve slipped up in the past, there might still be room for negotiation. “Sometimes, companies can be willing to work with you if you have experienced some sort of hardship,” Tayne says. That could include if you experience an illness or the sudden loss of a job. Alternatively, if you’re heavily buried in credit card debt and can’t get a lower rate, she suggests that you consider trying to settle for a lesser amount than your original balance. However, this option comes with its own credit and tax consequences.
Opt out. When your credit card issuer raises your interest rate, you can opt out of the increase. Black notes, however, that opting out means your account will be closed. “You will still owe your existing balance (if applicable), but if the account is closed, you will not have the ability to make any future charges,” she says.
Tayne adds that you’ll need to pay off your remaining balance at your previous interest rate. “If you’re carrying a very high balance, this may be your best bet,” she says, because a higher rate on a large balance could make it tough to stay on top of payments. “If you have a relatively low balance, you’ll be less affected by the change,” Tayne says.
Note that closing a credit account can negatively affect your score because it immediately reduces your available credit and increases your credit utilization. “You’ll only want to opt out if the interest rate is going to serve a major blow,” Tayne says.
[Read: Best Credit Cards Without Balance Transfer Fees.]
Apply for a new card. Rather than simply opting out of the rate hike and closing the account, you can open a new credit card at a better interest rate. However, a better interest rate may require better credit.
One strategy that can greatly reduce the impact of a rate increase is getting a new credit card that offers a balance transfer for new customers. This lets you move your balance from the high-interest card to one with a lower rate, or even a temporary zero percent APR, for a small fee. If the credit limit is comparable to your old card, you should be able to close the high-interest account once the balance transfer is complete, with minimal impact on your credit score. And if you take advantage of the lower interest rate, you can pay down your balance faster because a larger portion of your payment will be applied to the principal balance rather than interest charges.
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Why Did My Credit Card Interest Rate Increase? originally appeared on usnews.com
