ADVERTISEMENT

Yes, rates will rise on closed accounts with balances

CARD Act exception lets issuers pass along Fed rate hikes, and those are coming

By  |  Published: December 3, 2016

Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

Ask a question.

'Credit Smart' archive

Question

Dear Credit Smart,
If I close my credit cards with balances on them and continue paying them off does the interest rate stay fixed from the day I close them or does it fluctuate? I am current and in good standing with all. Just worried if they start raising the rates. – Diane

Answer

Dear Diane,
Unfortunately your worries are not unfounded.

The CARD Act of 2009 mostly forbids card issuers from raising interest rates on existing balances. If your card issuer decides on its own to raise rates, the law provides an opt-out mechanism: It lets you convert the debt to a five-year installment loan at the existing rate.

However, there are five exceptions to those rules and chances are you fall under the one that exempts variable rate credit cards tied to an independent index. Card issuers can pass those along to their customers. So, unless you truly have fixed rate cards, you have every right to be concerned.

I want you and my readers to know that fixed rate cards are very rare these days. Nearly all the popular cards available today carry a variable rate tied to an independent index – most commonly, the prime rate. The prime rate moves in lock step with the federal funds rate set by the Federal Reserve.

That hasn’t been much of an issue lately, but most experts believe that the Federal Reserve will raise interest rates this month and probably two more times in 2017. In fact, we could be looking at many years of rising interest rates. What that means for you and for most of my readers is that your credit card interest rates are going to be raised on your existing balances, whether your accounts are closed or not.

For you and others carrying balances, the rising rates can be a challenge. Accorting to a September 2016 study by the credit bureau TransUnion, about 9 million Americans will struggle to pay higher interest rates.

You say that your accounts are current and in good standing, which leads me to believe that you have fairly good credit. My suggestion would be for you to look for a balance transfer card with a 0 percent interest rate, with the longest interest-free period and the smallest fee you can find. In today's market, the most common balance transfer deal is 0 percent for 12 months, with a 3 percent fee.  A year may not be enough time for you to pay off the cards, but it will give you some breathing room while you decide what your next step should be.

You could also explore a fixed-rated consolidation loan to pay off your credit cards. These options may be limited, depending on the total amount of debt you have. I would not suggest that you trade this unsecured debt for secured debt by using your home or other property as collateral for a loan.

A third option would be to contact a nonprofit credit counseling agency about a debt management plan. DMPs are designed to get you out of debt in five years or less with fixed interest rates. Your accounts will be closed on a DMP, which you are apparently prepared to do anyway. On the plus side, your rates will not increase as long as you are on the plan. Of course, my recommendation for the best place to find an agency is to work with those affiliated with the National Foundation for Credit Counseling.

Remember to always use your credit smarts!

See related: Consumers gain right to opt out of rate increases, Credit card debt payoff calculator, Balance transfer survey: Shop around because deals vary

Meet CreditCards.com's reader Q&A experts

Does a personal finance problem have you worried? Monday through Saturday, CreditCards.com's Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.

ADVERTISEMENT
ADVERTISEMENT

Join the discussion
We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.




Updated: 08-20-2017

ADVERTISEMENT


Weekly newsletter
Get the latest news, advice, articles and tips delivered to your inbox. It's FREE.


ADVERTISEMENT