Law caps service members' rates on old debt, not new

6 percent rate cap applies only to balances incurred before active duty

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question Dear To Her Credit,
My question is in regards to the Servicemembers Civil Relief Act. Prior to being called to active duty, I obtained a credit card with a pretty high interest rate. Because the interest rate is high, I normally keep no balance on this card.

I requested that the interest rate be lowered because of my orders to active duty, but I was denied the rate lowering because I don't keep a balance on the card. Is this correct? Can they deny the lowering of the card's interest rate according to SCRA rules, just because I don't carry a balance? -- Tara

Answer Dear Tara,
The Servicemembers Civil Relief Act, or SCRA, covers all active-duty service members, reservists and members of the National Guard who are on active duty. The protection begins on the date of entering active duty and generally terminates within 30 to 90 days after the date of discharge from active duty.

The SCRA states that creditors cannot charge you interest above 6 percent for any credit obligations established prior to active duty or activation. The banks cannot retroactively charge for the excess interest once the service member leaves active duty, either. Any portion above the 6 percent cap is permanently forgiven.

Not only is the interest rate lowered for outstanding credit, but the minimum payment is, too.

The lower rate required by law for service members in active duty only applies to the debt balance you had when you went into active duty. However, if you or an authorized user such as your spouse made any charges on the same card after you went into active duty, those charges would not be covered by the law. The bank could still apply the old, higher rates to any new charges.

It's important to know the benefits to which you are entitled under the act, so you can make sure you receive them. In addition to the interest cap on pre-existing debt while you are on active duty, some of the law's provisions are:

  • You are protected from eviction for nonpayment of rent for a period of time -- generally three months -- while you are on active duty. The protection is limited to housing that rents for $3,218 per month or less in 2014, adjusted annually for inflation.
  • You may terminate a housing lease if you receive permanent change of station orders, or if you are sent to a new location for 90 days or longer.
  • Your life insurance policy cannot be canceled for nonpayment in many circumstances. The federal government safeguards your policy from default while you are on active duty, up to a maximum policy coverage of $250,000.
  • A mortgage that originated before you went into active duty is temporarily protected from foreclosure, if your ability to make the payments was materially affected by your military service and you meet certain other qualifications.
  • You cannot be subject to a form of double taxation when your spouse lives and works in one state, while you maintain permanent legal residence in another state. Under SCRA, states cannot use the income earned by a service member in determining the spouse's tax rate, when they don't maintain permanent legal residence in that state.

Most of these provisions are intended to help service members who experience financial difficulty while they are on active duty. You've kept your finances in good order by not carrying a balance on your card. Even though the Servicemembers Civil Relief Act doesn't apply to your credit card, you're in far better shape than you would be if you carried a balance, even at the capped rate of 6 percent.

See related: Military families remain easy prey for ID theft, Servicemembers Act helps, but soldier, straighten up your debt

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Updated: 01-21-2018