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What Should I do About Increased Credit Card Interest Rates?

by Ryan Guina

The Credit CARD Act of 2009 is only a few months away and credit card companies are already raising rates and changing credit card terms in anticipation of more strict credit card regulations. You may have already seen changes to your credit card terms even though the Credit CARD Act won’t officially go into effect until February, or possibly as soon as December. I know I have already received new terms for the majority of my credit cards. The changes won’t affect me very much since I pay my cards in full each month, but if you carry credit card debt, then raised interest rates or other changes to your credit card terms may have a big affect on your bottom line.

Here is a reader question concerning new credit card terms and raised interest rates:

We currently have roughly $10,000 on a Citibank Driver’s Edge card, which is the oldest card on my credit history – it’s the one I’ve had since I was a freshman in college. We have an additional $10,000 spread evenly across a Discover Card (15.24%) and Chase Flexible Rewards Card (19.8%). We’re in the process of furiously debt snowballing / snowflaking to get rid of the Chase balance first, followed by the Discover, and then the Citi balance. We’ve taken the step of facing our consumer debt and are meeting the challenge head on.

Unfortunately, I just received a notice that my Citibank card is going from a fixed 6.18% rate to a VARIABLE one where it’s going to be prime + 14.99%. I can opt out and close the card; my expiration date is April 2011. I have already tried transferring some of the balance from the Discover / Chase cards to the Citibak card, but Citibank tells me that there are no available balance transfer offers for that account. I’m sure it’s tied to the super low fixed interest rate.

My husband and I currently own our home and may be looking for a used car in the next year to two years. We have a slight emergency fund built (less than $2,000) but I’m hesitant to tap into it in case we need to repair our older model cars or we have a medical emergency since we maxed out our FSA when our child was born.

My question is this: Should I opt out of the Citibank card and continue to pay it off at the 6.18% (estimated to pay it off completely in July 2013 at the current interest rate after paying the Chase/Discover down first) -OR- should we keep that card because I’ve had it the longest so as not to impact our credit score?

What to do about increased credit card interest rates

Thanks for the question. I think you are doing the right thing by snowballing your credit card debt – the sooner you eliminate one card, the easier it is to make big progress on your other cards. The psychological advantages of eliminating one credit card from your debt is also a big victory and can provide a motivating factor to eliminate the rest of your debt.

Here is some information that may be helpful. As always, check with a financial planner before making any major financial decisions.

Stop using your credit cards. Any new charges you make on your credit cards adds additional time to your debt repayment schedule and makes it more difficult to repay your credit card debt. Work on a cash only system and use your emergency fund for unexpected expenses.

Emergency fund. A $2,000 emergency fund is a great start, and it is better utilized for emergencies than for paying down your debt. As you mentioned, there is a possibility your emergency fund may be needed in the near future. Using your emergency fund to eliminate a small amount of credit card debt increases the likelihood that you will need to use your credit cards for any unexpected expenses.

0% Balance Transfer Credit Cards. Some credit card companies offer a 0% introductory rate for new customers. It sounds like the issue you ran into came when you tried to transfer a balance to your current cards, but that wouldn’t apply to you if you open a new credit card. Even if you do not qualify for a 0% balance transfer on a new credit card, you may be able to transfer your balance to a card with a lower fixed rate. Here is more information about balance transfer cards.

Negotiate with your other credit card companies. Credit card companies are a little less likely to budge on their interest rates compared to a year ago, but it never hurts to try. You may be able to negotiate a lower rate, or get your variable rate card moved to a fixed rate credit card.

Closing credit card accounts can affect your credit score. Another option is one that you brought up in your question. Closing your credit card will lock in your current fixed rate, but it could have an affect on your credit score. Your credit score is made up of several factors, two of which are available credit and age of credit. Closing your Citibank card would affect you on both accounts because it is your oldest card and because it has your highest balance. Your score would probably drop, though I can’t venture to say by how much. Here is more information about how canceling credit cards can affect your credit score.

Should you opt out of the Citibank Card?

This is a difficult decision to make, and one that I can’t make for you. If you think you may need a loan in the near future, then maintaining a higher credit score will be important. If that is the case, then applying for a new credit card with a 0% balance transfer offer could save you money, allow you to keep your old card, and help maintain your credit score. If you don’t think you will need a loan in the near future or maintaining your credit score is not a major concern in the near term, then canceling your card and keeping the low interest rate may be a good option.

I wish you luck with whichever decision you make, and I hope you will continue using the debt snowball to eliminate your credit card debt.


Published or updated October 6, 2014.
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{ 13 comments… read them below or add one }

1 Miranda

It really is too bad that the credit card companies still have the upper hand. However, that is the truth of the case. In many cases, we need them in order to keep good credit scores and remain in good standing so that we can get jobs, mortgages and better insurance premiums.

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2 fredct

The good news is that once the bill full takes effect, they won’t be able to pull this kinda junk anymore. So it should be no surprise that they’re more than willing to try to fill up on their ethically-questionable tactics while they still can.

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3 Ryan

The credit card companies can no longer raise rates on existing balances unless you default on a payment to them. However the credit card companies can bump interest rates for new charges if they give advance notice. That is one reason why many card companies are going to variable credit card rates instead of fixed rates, though the variable rate cards are usually based on the “prime rate plus” so they only vary as the prime rates vary.

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4 Financial Samurai

I think we first have to NOT blame credit cards and look inwards at our spending habits. To open up another credit card with a 0% balance just delays the inevitable, if there’s no change in spending.

Credit Cards exist to make money off of us, that is their business. They can’t be blamed.

Try and get in the mentality that if you can’t pay off your credit card in full every month, you can’t afford it.

Think to yourself it is absolutely IRRATIONAL to keep spending money on junk and wants if you already have CC debt. Your kitty is spent, change the way you consume.

Or, just find ways to make a lot more money.

Good luck!

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5 Ryan

FS, changing spending habits is the most important part of the equation, and a 0% balance transfer offer can be a great tool as long as one changes their habits in conjunction with the balance transfer.

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6 Credit Card Chaser

@ Financial Samurai

“Try and get in the mentality that if you can’t pay off your credit card in full every month, you can’t afford it.”

I love this statement. I think that I may have to steal that and use it somewhere else! Well said synopsis of the way that most people SHOULD treat their credit cards.

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7 Financial Samurai

Hey CC Chaser – Sure, steal away! Just give me a shout-out! :) Thanks for stopping by my site btw and sharing your thoughts on the mind-numbing flat tax debat I’ve got going on.

Best, FS

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8 Manshu

I’d just get rid of the card. Credit score will be impacted, but doesn’t look like it is going to be used in the next few years anyway.

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9 Daniel K

I got one of these notices and called to opt – out as I’d like to pay it off anyways.. they came back at me with an offer for a LOWER APR than I am currently paying, with cash-back rewards.. LOL. Guess they liked my business too much.

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10 Ryan

That’s awesome, Daniel! I’d still do my best to pay it off as quickly as possible, regardless of the rate they are offering. :-)

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11 fredct

Samurai, you are correct that people shouldn’t put themselves in that situation in the first place. However, that doesn’t mean we have to say it’s okay for credit card companies to change terms & rates at their whim to really put the squeeze on people who do make that mistake. Two wrongs does not make a right, especially when one of the two parties has almost all the power.

Furthermore, it does happen for *some* people that they’re situation is more bad luck than bad planning. It’s possible to lose your job, or come down with a significant injury or illness, such that you can burn through even your best planned emergency fund. Especially for those people, we need not sit back and say it’s okay for credit card companies to jack their rates and change their terms to make the payback more onerous. That’s not right, and it shouldn’t be allowed. If I lose a few cash rewards for it, I’ll deal (although, none of my 4 cards have yet made any changes in terms that have taken a dime out of my pocket)

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12 Melody

Does anyone know where I can find info on CC companies not being allowed to waive fees due to the new Card Act of 2009? I have incurred a late fee, returned payment fee & finance charges because of an error I made on my part making me late. I have talked to the cc company 4 times, the last being a supervisor where he told me about the Card Act.

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13 Ryan

Melody, I haven’t heard anything about companies not being allowed to waive fees because of the Credit CARD Act of 2009. More likely they are choosing not to waive fees because the new laws will reduce the number of methods they can use to collect fees. If you want another way to try and get the fees removed you can tell them you will cancel the card. This may or may not work, and even if you cancel the card you will still owe the balance at the same interest rates you were paying. You could apply for a 0% balance transfer credit card to transfer any outstanding balance to a 0% interest rate. There is usually a fee to transfer the balance though, so you should run the numbers before doing anything like that. Also keep in mind that it could affect your credit score.

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