What to do when facing a credit card rate increase?
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Dear To Her Credit,
I recently noticed a rate hike on my credit card APR. I called the company to see if I could close the account and pay off my balance, and not be subjected to the new higher interest rate.
The representative was very abrupt with me and told me I was not allowed to close the card at this time and I have to wait for another rate hike to close the card and opt out. He said if I closed the card outside of an "opt out promotion," I would still be subjected to future APR (annual percentage rate) increases. (I thought you could close your account at anytime and pay off under the terms that were active when you closed the account.)
Was he correct? -- Kristy
Most credit card companies now allow you to opt out of an interest rate increase. Under current law, credit card companies are not required to let you close a variable rate account and pay off the balance at the old rate. Because banks provide this option voluntarily, they can indeed set deadlines for opting out of a given rate increase.
Apparently you have missed the deadline for opting out of the latest rate increase. The representative was right -- you can't opt out of it after the deadline; nor can you opt out of the next increase before you are notified. (Never mind the abrupt part. When I talk to people like that, I try to just be thankful I don't have to go home with them!)
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The representative was confused about closing your account -- you are free to do that any time. Of course you'd have to find money to pay off the balance or transfer the balance to another credit card. You can ask your bank if you can make your account inactive and freeze the interest rate while you pay it off, but there is presently no rule saying they have to let you do that.
The other option is to wait for the next rate hike and opt-out window. Whether you close the account or choose to opt out, you won't be able to use the account. However, with opting out, the card is still reported as open on your credit report, which should help your score. Also, if you ever need to use the card, you can simply start using it again. Be aware that by doing so, you will automatically be subject to the current interest rate.
To take advantage of the next opt-out window, you'll have to keep a close eye on your statements. When the next window is announced, immediately send an opt-out letter (preferably by certified mail). For step-by-step instructions and a sample opt-out letter, read "How to opt out of credit card rate increases."
I'm not one of the people who think credit cards are inherently bad. In fact, I encourage people to use electronic banking and credit cards because it's safer, more convenient and leaves a better money trail than using cash. However, credit cards are a lousy way to borrow money. The Credit CARD Act of 2009, a reform law whose main provisions go into effect in February 2010 will restrict how credit card issuers can raise rates and give consumers the right to opt out of increases, but many companies are already raising rates before the law goes into effect.
The best advice I can give you is to use credit cards as payment tools and convince yourself that the entire balance is due every month. If you need a long-term loan, get something with a fixed rate. Another option is to find the money by selling something, moonlighting or squeezing the old budget someplace else. Remember, if you never carry a balance, your interest rate will be of no interest to you.
Take care of your credit!
See related: Not all issuers allow you to opt out of rate increase, Steps to try and opt out of a credit card rate increase, How to react to a 'rate-jack' attack, Sample opt-out letter, Not all issuers allow you to opt out of interest rate increases, A comprehensive, interactive guide to the Credit CARD Act of 2009
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