Hit with a credit card interest rate increase: Do you cancel?

Weigh all your options before you cancel a credit card

By Todd Ossenfort

The Credit Guy

The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues. Ask a question 'The Credit Guy' archives

Dear Credit Guy,
I was recently sent an interest increase by my bank card. I have been a longtime client and have always paid on time. I was given a much higher rate -- adding 12.96 to prime rate. I have a large balance on this account and was given the option of canceling and paying down the balance at the existing rate of 5.99 percent. What are the downsides to canceling the account? -- Laura

Dear Laura,
I believe a better question to ask is, "Can I afford to pay what I owe on my credit card account at a much higher interest rate?" You are most likely asking about the potential downside of closing your account as it relates to your credit score. I know most people are very concerned about keeping their credit score as high as possible. In addition to concern for your credit, I'd like you to give equal or more weight to the consideration of your overall financial health.

Closing your bank card account will negatively affect your credit score if:

• The account that you close is one of your oldest accounts.
• Your credit used to credit available ratio -- often called the credit utilization ratio  -- will increase based on your remaining open accounts

Hit with a interest rate hike? Here's a step-by-step guide
These CreditCards.com articles about what to do if your credit card APR is going upwill help you take the proper steps to take to protect yourself and your credit. Sample opt out letter Balance transfers 101 6 steps to successful balance transfers Balance transfer calculator For some, switching credit cards gets harder Not all issuers allow you to opt out of interest rate increases Take these steps to opt out of rate increases When do credit card balance transfers make sense? Hit with a credit card increase: Do you cancel? How to cancel a credit card Printable worksheet: How to cancel a credit card step by step What to say when you can't pay Credit card etiquette: How to politely win in credit card disputes Want a lower interest rate? Just ask! Credit card issuers more open to debt deals, but fewer qualify What is credit counseling? Check out credit counselors' credentials first

How much your credit score will be affected will depend on many factors such as what your score is now, the two items listed above, and the other items included in your credit report. The other potential downside to closing your account is that you no longer have access to any of the credit available on that card.

To present a fair and balanced response, let's review the potential positives of closing the account. If you close the account, it will positively affect your financial health by:

• Allowing you to pay the remainder of your balance at the much better interest rate of 5.99 percent, potentially saving you hundreds if not thousands of dollars in interest charges.
• Keeping you from adding to your balance and increasing the amount of time it takes to pay off the account.

With our current financial climate, credit card issuers will continue to make decisions to improve their profitability, just as any for-profit company does and should do. Those decisions include raising interest rates, decreasing credit limits and tightening requirements for new lenders. What I encourage you and all of my readers to do is to take a page from the card issuers' playbook and make the changes necessary in your own financial lives to assure you are in the black.

By that I mean take a look at your spending plan, your fixed monthly expenses, your savings plan, your retirement plan and any other elements to determine if you are meeting your goals and if you need to make adjustments. The downturn in our economy has meant change for just about everyone. Make sure you are doing all that you can to protect your finances and your future.

That may mean a concerted effort to pay down debt quicker and avoid adding to credit balances, putting additional money into savings in the event of a job layoff or income reduction, increasing retirement contributions, cutting back on expenses, saving for a summer vacation or large purchase rather than charging it, etc.

Should you decide to close your credit card account or not, I hope you base the decision on what is best for your financial health.

Take care of your credit!

See related: Canceling an old card with a bad history isn't always smart, Consider these factors when deciding to cancel credit cards, 7 times when it's OK to cancel a credit card, The true cost of canceling a credit card, How to cancel a credit card

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to The Credit Guy.

Published: March 30, 2009

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