After the passage of the Credit CARD Act of 2009, credit card companies have been scrambling to find ways to increase income – and unfortunately, part of their strategy is raising interest rates on current cardholders.
Sometimes it is simply a reaction to the card company's bottom line, but other times it is a result of a cardholder's action. Here are some common-sense steps you can take to decrease the likelihood that your rates will go up.
- Pay on Time – Being late with one payment can affect your interest rate. If you are up to 60 days late, you may be charged a prohibitive penalty rate on future charges (along with your current balance), until you have six consecutive months of on-time payments. Chronic late payments of shorter duration may also incur a higher interest rate.
When mailing a check, make sure to give plenty of extra days for the check to arrive. Connecting your credit card to a bank account for automatic withdrawals solves this problem, but can create another if you do not watch your account balance. Additionally, it opens the door to security concerns.
Regardless of your payment method, make sure that your payment will arrive on time with the correct payment amount, and verify your bank account balance to avoid a bounced check or an overdraft.
- Stay Well Below Your Credit Limit – Maxing out your credit card or constantly running close to the limit makes you a higher risk in the eyes of the credit card companies, and will earn you a higher interest rate as a result. Try to keep your outstanding credit at less than 20% of your credit limit.
- Keep Overall Debt Low – High levels of total debt raise your risk factor, especially if the ratio of your debt to your income is high. If your debt is in the form of other credit cards and/or your total debt is rising while your payments are decreasing, you are likely to see a rate increase that just exacerbates your problem.
If you see a rate increase despite your good credit practices, it is up to you to decide whether to accept the increase or take action – but first you must realize the rate increase is coming.
The law requires that you be given 45 days advance notice of a rate hike. However, if you fail to read the notice, you will be caught unprepared.
Your rate increase notification often looks like junk mail. As unpleasant as it can be, open all your mail from the credit card company and read it thoroughly to avoid surprises.
If you are hit with an interest rate hike, what can you do?
- Opt-Out – Thanks to the Credit CARD Act, you have the right to opt out of an interest rate hike and close the card account. You will still have to pay off your balance at the old rate, but you can no longer use that card for new purchases.
You may also be able to transfer the balance to a lower-rate credit card, but look into all the transfer fees first.
- Negotiate – If you have a good customer record, try negotiating for a lower rate. The worst that can happen is that they refuse and you still have an opt-out available to you.
- Accept the Change – Before immediately cancelling and shifting to a new card, make sure you take into account all of the associated fees and costs. A slight rise in interest rates may still be preferable to your other available options.
Of course, there is one surefire method to blunt the effect of interest rate hikes – never charge more than you can afford to pay at the end of the month. If you never carry a balance, the interest rate does not matter.
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