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.
Dear Opening Credits,
I have a question relating to these credit card laws; if a card issuer has sent me a letter stating that my two cards that I have with them (student accounts) will, as of Jan. 31, 2010, have a 29.99 percent APR, is there any way to fight this? I have already called Citi and was told that there is nothing that they can do for me, a student with good payment history. Is there anything that I can do to push them into offering me my current rate on both cards? Thank you. -- Josh
Dear Josh,
Let me begin with a riddle: When is a high credit card interest rate on a credit card irrelevant?
Answer: When the cardholder never keeps a balance.
Think about it, Josh, even if Citi were to hike your APR to 300 percent, you wouldn't be charged a dime if you paid your balance in full by the due date. It's a pretty sweet deal, actually. You can borrow money from a credit card company, and as long as you pay the total debt within the grace period -- typically 20 to 30 days -- the loan is free.
Dealing with a financial institution rather than, say, your parents, has its advantages. You'll never hear the dreaded, "Now son, remember when you didn't have enough cash for books because you mismanaged your funds and we bailed you out." Not only that, responsible charging activity translates into a positive credit history and credit score, both of which you'll need when you graduate and look for a job, rent an apartment and finance a vehicle or other major purchase.
You didn't specify whether or not you currently owe money to your creditors, but if you don't, keep it up! Charge only what you can afford to pay in full before the grace period ends, spend under your credit limit and get your payments in on time. Follow that simple formula and the interest rate increase won't affect you.
On the other hand, if you are carrying a balance right now, that looming new rate will indeed matter. It's totally legal for your credit issuer to raise your APR (as long as they give you written and timely notice, which they did), but 29.99 percent is definitely too high for comfort. Here's an example of how much you would pay in finance charges with a decent interest rate of 15 percent as opposed to the one that's looming on your horizon.
Let's say you have a $3,000 balance, but can only afford a $100 monthly payment. Below is a comparison of what a higher interest rate can cost you -- both in terms of money and time:
THE REAL COST OF A HIGHER CREDIT CARD INTEREST RATE
Paying off $3,000 at 15% APR
Paying off $3,000 at 29.9% APR
Months to pay off: 38
Months to pay off: 56
Total interest charges: $784
Total interest charges: $2,593
Clearly the difference in interest charges is pretty huge, so if you aren't in the position to pay down what you owe in a few months, you'll need to take action.
To contest the APR increase, you're going to first need to understand why it's happening. You say you have a good payment history, so perhaps your debt is too high. If it's greater than 60 percent of your credit line, that's a likely reason. In that case, you will need to get the debt down. When you do, make another call to Citi, point out your retooled debt-to-credit-limit ratio, and request a better rate for all your hard work. Explain that you would like to keep them as your credit card company for a long time and ask that they work with you to make that happen. Creditors want your business, and if you prove to them that you are an excellent customer, they typically respond favorably.
If your negotiations fail, you are free to take your business elsewhere. Consider moving on to another credit card company -- like Bank of America, Wells Fargo, Chase, American Express or Discover, just to name a few -- with terms you do like. If you have a balance and want to transfer it to one with a better interest rate, be sure the APR lasts for at least a year. A 6 percent interest rate can sound great, but if it will climb to three times that in a few months, the move will be pointless. Also check out the balance transfer fees, which can eat into the savings you get with the new, lower rate.
Lastly, don't try to "push" creditors into anything. It's generally an ineffective way of getting what you want. Instead, demonstrate to Citi what a terrific borrower you are. Your actions should shout, "Here's how great I am," while your words say, "Here's how you can keep me as a happy customer."
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.
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