If an issuer increases your interest rate, do you cancel the credit card?
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Opening Credits
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Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I have been a customer
of MBNA for well over three years, never been late on one payment, ever!! I
received a notice that as of May my interest will be going up 3 percentage points which,
in the big picture, isn't a lot, but I do carry a balance and am really not
happy about paying more. I do have another credit card, a line of credit and
car loan with various financial companies. If I opt out of the credit card that
is upping my rate, will it really affect my rating that much, and how does it
work for payments? Can the credit card company just demand that I pay the full
balance for me to close the account? -- Cindy
 Dear Cindy,
You've just brought up something that
everyone with a credit card needs to know: The company that has issued you the
account has the right to increase the interest rate on new purchases, even if you've done
nothing wrong.
However, as a cardholder you do have
some protections in place, thanks to the federal Credit CARD Act of 2009. First, rate hikes on existing balances are limited. Thay can be raised under specified circumstances, such as if you're late in paying by 60 days.
Rates on new purchases are another matter. Banks can do what they please with rates on new purchases -- but you have rights, too. As a long-term customer, the bank has to give you 45 days' notice of the hike, which should give you time to comprison shop for a better offer.
And you have the option to opt out of
their new "deal." This means that if you don't like it, you can close your
account and repay the balance that you have now at your current interest rate
-- as long as you repay what you owe in fewer than five years. So, in this circumstance,
you don't have to pay the full balance right away if you decide to close the
account.
Before you cancel the card, though,
give the company a call and ask if it will reconsider the change. Because
you've had the card for several years and have always paid on time, it may give
you a break. Keeping it active would be better for your credit score, too. Having and using an established credit account
where you have a history of positive activity is great for a score. If the bank
allows you to maintain your original APR, then you also won't have to go to the
trouble of finding and applying for a replacement account.
Another reason to hesitate is the
actual cost of the higher APR. Is the 3 percentage point increase really that bad?
The answer depends on the balance that you have on the card and how long it
will take you to pay it off to zero. Here are a couple of examples to
demonstrate:
One-year payoff time with no new charges:
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Balance
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Annual percentage rate
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Total finance charges
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$1,000 |
17% |
$95 |
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$1,000 |
20%
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$112 |
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$10,000 |
17%
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$945 |
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$10,000 |
20%
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$1,117 |
As you can see, you'd only lose $17
with the new APR on a $1,000 balance. Even if it were $10,000, paying $172 more
isn't horrendous. So what happens if you stretch out the payoff time much
longer?
Five-year payoff time with no new charges:
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Balance
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Annual percentage rate
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Total finance charges
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$1,000 |
17% |
$492 |
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$1,000 |
20%
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$590 |
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$10,000 |
17%
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$4,912 |
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$10,000 |
20%
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$5,897 |
The difference between a 17 percent
and a 20 percent APR still is not dramatic if your balance is just $1,000 and
you extend the payoff to five years -- just $98. But if you were to owe 10
times that and it took you 60 months to be in the clear, the total finance
charges would be terrible, whether your APR is 17 or 20 percent.
Should you stick with MBNA, even at
the higher rate? The choice is yours. But the main issue is your balance on the
account. If it's large, pay it off as swiftly as you can. Not only will you
help your credit score (since debt-to-credit-limit is a major factor), but
you'll save a massive amount of money.
See related: CARD Act prevents sudden rate hikes, not annual fees
Erica Sandberg's articles and insight are featured in such publications as the Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSNMoney.com, and Smartmoney.com. An active television and radio commentator, Erica is the credit and money management expert for San Francisco’s KRON-TV, a frequent guest on Forbes Video Network, Fox Business News, Businessweek-TV, and all Bay Area networks. Prior to launching her own reporting and consulting business, she was affiliated with Consumer Credit Counseling Services of San Francisco where she counseled individuals, conducted educational workshops, and led the media relations department. Erica is a member of the Society of American Business Editors and Writers, and on the advisory committee for Project Money.
Send your question to Erica.
Published: April 11, 2012
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