Credit card interest rate hikes can strike at almost any time, even if you have pristine credit history. But when your favorite card loses its low rates, it doesn’t necessarily mean that you’ll have to start shelling out more in interest.
If you’re facing a rate hike, here’s what you can do about it:
Check your mail
Because of the Credit CARD Act of 2009, your issuer is required to mail you a notice about increasing rates and other significant changes to your account 45 days in advance. In the letter, which will give you more information about the new terms, you’ll usually get two options:
- Keep your card as the interest rate goes up.
- Opt out of the change, close your account and pay off your balance at the original rate.
If you don’t reply by the deadline, your account will remain open, and the interest rates will change on the scheduled date.
Identify the cause
Issuers sometimes bump rates for business reasons. Other times, your actions may trigger a rate increase. Under the current law, though, you won’t see an increase unless you’ve had your card for at least a year. Possible reasons for the change include:
Your credit score took a dive. If your credit score dropped significantly, your issuer may see you as a riskier borrower and raise your interest rates.
You’ve missed payments. If you missed two payments in a row, your issuer can charge you a penalty annual percentage rate. Because of Credit CARD Act provisions, this APR will return to the regular rate if you pay on time for six months in a row.
The prime rate went up. If you have a variable-rate credit card, your interest rates will go up as the federal prime rate rises. To find out whether you have a variable-rate card, look at the Schumer box listed on your issuer’s website.
The promotional period is ending. If you have a 0% APR offer that expires in 12 months, your issuer isn’t required to remind you when that time period runs out. It’s up to you to set a reminder to pay off your balance by that date.
Focus on improving your credit if the better score would decrease your interest rate. But if the reason for the increase is out of your hands, start thinking about your next move.
Find the best option
Before deciding what to do with your account, consider how the change might help you or hurt you.
Closing your card. When rates go up, your first impulse may be to close your card and cut ties with the issuer. Because of the CARD Act, you can do that without any penalty from the issuer in some cases, such as when the prime rate goes up or your issuer decides to raise rates. But if you close your account, you’re still on the hook for paying the balance. If you have a large balance, consider looking for a 0% APR balance transfer deal to save on interest.
Keep in mind that closing an account generally lowers the average age of your accounts and increases your credit utilization ratio. This could hurt your credit scores in the short-term.
Leaving your card open, but using it differently. Unless you’re paying penalty APR, you won’t have to pony up additional interest on your existing balance because of an interest hike. If you want to trim costs, focus on repaying your existing debt and hold off on charging new purchases for a while.
Start taking advantage of the grace period and minimizing interest costs by paying in full every month. Avoid transactions that don’t have grace periods, such as cash advances. If you want, you can even stop using this card altogether. Just keep in mind that after a certain period of time, the issuer may close your card because of inactivity.
An interest hike can hurt, but with a little comparison shopping, you might be able to find a credit card deal that’s even sweeter than your current one. Even if you can’t find a better match, it never hurts to look. You may decide that you old favorite credit card, raised rates and all, is not as bad as you thought.
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