Dealing with a Credit Card Rate Increase

Dealing with a credit card rate increase can be successful if you know what questions to ask and what steps to take. Do your research before you consider opting out of the interest rate increase. The research can do save you money and protect your credit score.

Credit card issuers use a variety of techniques to improve their profits including raising interest rates, adding or increasing fees, increasing minimum payments and decreasing credit limits. The CARD Act of 2009 contains provisions to regulate many of the card issuer's rate and fee activities. However, a card issuer can raise a cardholder's interest rate if the card issuer thinks the cardholder has become more of a credit risk.

Card issuers typically consider raising a cardholder's interest rate as soon as they determine a change in the cardholder's credit history or payment patterns. They watch the cardholder's credit history for how they pay their bills on all of their credit and loan obligations. Some of the most common reasons for raising a credit card's interest rate are:

• Late payment - A late payment on one of your credit cards can result in a rate increase on any of your credit cards. Depending on the terms of your account, your new interest rate could go as high as 30 percent.
• Available credit – Card issuers keep an eye on the total amount of credit you have available. They may be inclined to raise your interest rate if your credit history shows that you have increased your balances, leaving only limited available credit.
• Close to/over limit – Once your account balances reach your total available credit (the total of all of your credit lines), it is possible that one or more of your credit card issuers may increase your interest rate.
• Bankruptcy – Card issuers may increase interest rates on a cardholder who declares bankruptcy.

You will usually be given a period of time during which you can decide if you want to "opt out" or accept the higher interest rate. If you decide to "opt out" from the rate increase, your credit card issuer will probably close your account. You will not be able to add additional charges to your credit card; however, you will be able to pay off your balance at the current interest rate.

There are several disadvantages to opting out from the rate increase including:

• Account age – Part of your credit score is based on how long you have had credit. If this credit card is one of the first credit accounts you opened, you may not want to close the account.
• Negative effect on credit score - Most credit card issuers will close your credit card account if you "opt out." Having less credit card accounts will usually have a negative impact on your credit score.
• No payment recording – Over one-third of your credit score is based on your payment history. Once your account is closed, the card issuer will usually stop reporting any payments to the credit bureaus. This lack of payment history can keep you from improving your credit score.
• Increase in utilization – About a third of your credit score is based on the percentage of your available credit you use. The more available credit you are using, the lower your credit score. If your account is closed, you no longer have access to that credit line, which means that you will be using a larger percentage of your available credit.
• Effect on other credit card rates – Credit card issuers are raising credit card rates on cardholders with lower credit scores. If you opt-out and your credit score declines, your other credit card issuers may decide to also increase your interest rate on those cards.

You should contact your card issuer as soon as you receive a notice that your interest rate is going to be increased. You may be able to negotiate a reversal in the decision to raise your interest rate.

Here are a few things to keep in mind:

1. You have a better chance of dealing with a credit card rate increase and getting your rate lowered if you have a long history of paying your bills on time and a good credit rating.
2. You will probably not be able to reverse the interest rate increase if your interest rate is being increased because you missed a payment. Even if you missed a payment on another credit card, this card issuer may want you to accumulate six to twelve months of on-time payments on all of your credit cards before they will reconsider lowering your interest rate.
3. You may be able to reverse the rate increase if you have an excellent payment history and were only late on one payment.
4. Some card issuers will lower an interest rate if you agree to sign up for the automatic monthly payment of your minimum credit card payment from your checking account.
5. If your rate is increased, you should concentrate on lowering your balance as soon as possible by either:
   • Paying off your balance
   • Transferring your balance to a lower rate credit card

• Pay on time
• Pay more than the minimum payment each month. By just paying as little as $10 more than the minimum payment due, your account may be considered as more desirable that the accounts on which only the minimum payments are being made.
• Use your card. Any charge on your card that is paid off immediately will be shown as a positive payment history, even a charge as low as $5. Having a balance on your credit card statement may also reduce the chances that your account will be hit with an inactivity fee.
• Know your credit score. Request a copy of your credit report about every three months. Look for any errors on your credit report and get them cleared up before they result in a rate increase.

• Is Debt Consolidation a Good Idea
• How Can I Improve My Credit Score Fast
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• What is a Good Credit Score

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