Options when facing a credit card interest rate increase

The economic crisis means increases may be harder to avoid

Question for the CreditCards.com expert

Dear Opening Credits,
I've only had a card for a few months, but they've already jacked up my interest rate like crazy. I was late with a payment, but it was only once and just for a couple of days. Is there anything I can do to stop the increase? -- Shannon

Answer for the CreditCards.com expert

Dear Shannon,
There are a few things you can try. However, in this troubled economy, those moves may prove to be much more challenging than they once were.

You haven't had your card for long, and your lender is probably worried that your late payment means you're a risky customer. Credit card default rates are on the rise, and late payments indicate to a lender that you may be having a problem. The company raised your rates to boost its profits on your account, making it worth its while to take that higher risk on you.

This higher rate is often called the "default rate." The default rate is applied to accounts that have late payments, and it can even go into effect if you charge over your credit limit or if you send a payment with a check that bounces. Under so-called "universal default," lenders can even raise your rates on your credit cards because you missed a payment on another loan, perhaps a mortgage or car loan. Universal default's days are numbered, thanks to new pro-consumer credit card regulations that take effect on July 1, 2010, but it's still worth keeping an eye out for until then.

You didn't say how high your rate is now, but the issuer could raise it to more than 30 percent. (The average default rate, according to a July 2008 study by consumer rights group Consumer Action, is 26.87 percent.)

I recommend you call the company and ask them to forgive your one transgression. I always encourage people to negotiate with lenders, but in your case, and given the lending environment, I don't expect you'll have a lot of luck.

For example, I recently talked to several Capital One customers who received a letter from the company, saying their interest rates would be increased. These customers were longtime users of their Capital One cards, and they say they were ideal customers -- never late on payments, never missing payments and even keeping small balances, meaning the company was making money on interest charges on their account. When the cardholders called the company to ask for interest rate reductions, they were declined. The company cited the overall economic climate as the reason for the interest rate rise. (It wouldn't comment on how many customers were affected.)

If those supposed model customers aren't able to negotiate for better terms, you may have an even harder time.

You may also have the choice to "opt out" of the increase. In this scenario, your current balance would remain subject to your current APR. However, the catch is that you would have to cancel that card. Many -- though not all -- issuers provide that option, so you should ask. Remember that canceling a credit card has an impact on your credit and needs to be done the right way, as this CreditCards.com article describes.  (Update: On Aug. 20, 2009, provisions of the Credit Card Act of 2009 went into effect that mandated consumers be given the right to opt out of increases in interest rates, fees, finance charges and certain other changes in credit card agreements. See story.)

If neither of these moves is a possibility, you can look into finding another card with better terms and doing a balance transfer. Given your short credit history, it's hard to say what kinds of rates you may find with another company, but it may be worth checking out. Don't be surprised, however, if a better deal is hard to come by. In today's economic climate, many card issuers are hiking rates, even for "good" customers, plus there is typically a balance transfer fee charged by the new credit card. 

The best way to stack the deck in your favor is to make payments on time, every time. On-time payments are one of the most valuable strategies you can use to establish a good credit history. Late payments will hurt your credit score, and as you've already seen, lenders will see you as a bigger risk, so they'll raise your rate. Plus, you'll get socked with a late fee. For tips on how to stay timely, read "7 tips to avoid a credit card late fee."

It's also crucial to know the terms of your contract with your credit card company. The same reforms that are outlawing universal default are bringing some big changes that will help consumers better manage their credit accounts. One of the changes affects how your credit card statement will look. On your bill, card companies will have to add a notation explicitly telling you what fee and rate increase your account may be subject to if your payment is late. Here's an interactive look at what your statement will look like. Again, card companies don't have to implement the changes until July 1, 2010, but some issuers are already phasing them in.

Good luck, and let us know how you make out. (And stay on time from now on!!)

See related: Regulators finalize sweeping credit card rule reforms, 7 tips to avoid a credit card late fee, Interactive: How your monthly credit card statement will look, How to cancel a credit card, Not all issuers let you opt out of APR increase

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.

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.

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

Updated: 02-17-2019