The Credit CARD Act, passed last year, offered some protections for consumers against some of the less savory practices of credit card issuers. The last of the rules go into effect next month. One of the biggest protections is the provision that issuers can’t raise rates on existing balances. This retroactive practice of raising interest rates can be costly to the consumer, and the CARD Act has clamped down on the practice.
Additionally, there are other limitations on when issuers can raise interest rates on credit card balances, including a requirement to notify you 45 days in advance, and allow you the chance opt out (although you may have to close your account to do so). This protection have given some the false idea that their credit card balances are safe from sudden interest rate hikes. This is not the case.
When Credit Card Companies Can Raise Interest Rates
Here are 3 loopholes credit card issuers can use to suddenly raise your interest rates.
1. Variable Rates
Credit card interest rates come in two main types: fixed and variable. With a fixed rate, the credit card issuer has to give you notice. However, with a variable rate, it changes with changes in the market. So, if interest rates in general rise, so does your rate — without the need for card issuers to notify you. But it only applies to new balances.
However, even the variable rate is determined with a specific formula. Issuers take a benchmark rate and add to it. So the formula might be benchmark + 13. So if the benchmark were two, then your interest rate would be 15%. If the benchmark rose, so would your rate (of course, it would fall along with the benchmark, too). Before issuers can change the formula, though, they do have to notify you. But it won’t stop your interest rate from changing with the market.
2. Late Payments
If you are late in making payments, your interest rate can be suddenly hiked. Indeed, if you are 60 days late, a sudden interest rate hike can be applied even to your existing balances. And, as you might expect, introductory interest rates are fair game. If you are even a day late with your payment, the credit card issuer can hike your introductory rate without warning.
Another loophole is the “special” rate loophole. Credit card companies are allowed to hike rates without warning as a penalty for late payments on special offers. So make sure you read the fine print. You might find that you are on notice for a sudden rate hike after a late payment on that great rate you are getting.
3. End of the Intro Rate
It would be nice if credit card issuers had to send you a notice that your introductory rate was about to expire. However, they don’t. Your interest rate can suddenly rocket up to the regular rate once your six to 12 months is up, and you may not have warning if you haven’t been keeping track. Make sure you know when your intro rate is about to expire.
45 Days’ Notice to Do What They Want
Of course, there is no limit to the interest rate you can be charged, and credit card issuers can do whatever they want — as long as you get 45 days’ notice. So credit card issuers are welcome to increase your interest rate as they wish, as long as they tell you ahead of time. In some ways, this is nice, since you have time to prepare or make other arrangements, but for those who have high balances and are trying to pay down credit card debt, there is not much that can be done (you might be able to qualify for a balance transfer credit card to get 0% interest). Unless you want to close the account and pay it off at the old interest rate.
As always, the best way to avoid these interest rate issues is to pay off your balance each month, and avoid making late payments.