Not paying your credit card bill after a rate hike won't help
With this column, Tanisha Warner debuts as our Credit Care columnist. She's the communications director for the credit counseling firm Money Management International and brings a great deal of knowledge about credit. Each week, she'll answer a question about credit from one of our readers.
Dear Credit Care,
I have multiple credit cards with different balances and interest rates. Recently, two of the cards have raised the rate to over 26 percent. At this rate, the balance will never be paid off, so I contacted them and asked for a more reasonable rate and they said no. I want to pay the debt off, but not at these rates. Should I wait for collection agencies to call and negotiate with them? -- Frank
First, I would encourage you to look at why your interest rates were raised. Generally, when an interest rate is increased to that high a level, it's a default rate -- which the issuer hits a borrower with as a result of multiple late payments. If you were having trouble making payments before the rate hike, the increased interest rate only made the problem worse.
Speaking of making a problem worse, not paying your credit card accounts and waiting for them to be placed for collection would do just that. It is not a solution I would recommend. You will seriously damage your credit and have to deal with your card issuers calling and writing in attempts to get you to pay. Not to mention that negotiating with collectors is not that simple and can be quite frustrating.
A better option to consider is contacting a reputable nonprofit credit counseling agency and speaking to a certified credit counselor. Your counselor will help you determine the best course of action for you and let you know if a debt management plan (or DMP) would be in your best interest. Depending on your finances and your credit goals, paying your accounts through a DMP may be an option to help pay your balances at a lower interest rate. However, there are two important things to keep in mind should you decide to enroll in a DMP: Your accounts may be closed, and you might be restricted from applying for certain types of new credit while on the plan.
Before you decide whether to let your accounts go to collections, you might want to brush up on your rights under the Credit CARD Act of 2009, which includes the most sweeping, pro-consumer reforms in the history of the credit card business. For example, the CARD Act states that the card issuer must re-evaluate your account every six months after an interest rate increase. If the rate went up because you were 60 days or more late with a payment, the law requires the card issuer to cure your credit card rate if you've behaved. That means that if you make six straight on-time payments of at least the minimum required amount following your mistake, the issuer is required to "cure" it by restoring your account to its previous interest rate. That's a pretty strong incentive to pay on time.
If the rate hike wasn't the result of an error on your part, issuers are still required to review your account every six months. Trouble is, in that instance, banks are under no obligation to lower your APR, no matter how promptly you pay on your account during those six months.
The Credit CARD Act also says any rate increase should only be applied to purchases made after the higher rate took effect. However, there's a big exception: If you're 60 days late with a payment, that higher rate can be applied to existing balances. As I mentioned, I'm assuming that's what's happening in your case. But if it's not -- and the rate hike was the result of the bank's whim and not your mistake -- check your statements. If you are being charged the 26 percent rate for existing balances, contact your card issuer in writing and request an explanation.
Handle your credit with care!
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