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 Credit Card 1, 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 Credit Card 2 (15.24%) and Credit Card 3 (19.8%). We’re in the process of furiously debt snowballing to get rid of the Credit Card 3 balance first, followed by Credit Card 2, and then the Credit Card 1 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 Credit Card 1 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 Credit Card 2 / Credit Card 3 balances to the Credit Card 1 balance, but the Credit Card 1 issuer 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 Credit Card 1 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 Credit Card 3 and Credit Card 2) -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 Credit Card 1?
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.