Why APR keeps rising on closed card with a balance

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 CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs.

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Question Dear Sally,
Bank of America keeps raising my variable interest rate on a closed account that I have been making payments on. I pay more than the minimum amount, and I have tried getting them to settle for an amount, but all I get is the runaround.

How long do I have to keep paying before I can legally stop making payment, even though morally I should? I know it will reflect on my credit history and score. – Suzanne


Dear Suzanne,
Punishing a bank by not making payments is a terrible idea. You’ll only hurt yourself. You may be angry with your credit card company, but it’s much more important that you consider your options and do what’s best for you rather than make decisions based a desire to get back at the bank.

The reason you had your interest rates rise is most likely due to the prime rate going up, and interest rates for credit cards have been following. That’s not unique to Bank of America. You would generally see the same effect from any credit card with a variable interest rate. The rate hikes are likely to go up further soon: The Fed has penciled in three rate hikes for 2017.

While you describe the account as closed, it is really closed only in the sense that you no longer can use it to gain access to credit. The account still exists, and is accruing interest monthly because there is a balance.

Banks are limited by law on when they can raise interest rates and how. The Credit CARD Act of 2009 prohibits rate hikes on existing balances except in certain circumstances (and because your account is closed, it’s an existing balance). Those circumstances are:

  • When your card introductory period ends.
  • If your interest rate is variable and tied to an index, and the index rate rises.
  • If you had a workout plan for debt repayment and you either complete the plan or fail to keep up with the plan.
  • If you are more than 60 days late making a monthly payment.
  • If you had a lower rate because you were a military service member in active duty, and your active duty ends.

There is no time when you can just stop making payments without consequences. If you quit paying, you can count on your rate going up much more quickly than it has already. Throw in some late fees, and interest on the late fees, and your balance will grow at an alarming rate. Eventually, your credit score will suffer, and the bank will use harsher collection tactics. They may even take you to court. You’ve been making more than the minimum payment – you need to keep doing that to protect yourself.

You’re not likely to get your balance reduced without a very good reason, either. Contrary to what you may have heard on some radio and other ads, it’s not that easy to convince a bank to lower your balance. You must have a reason, such as extended unemployment or other hardship, for them to even consider it. Otherwise, a good share of their customers would spend the limit on their cards and then ask to have the balance reduced. That wouldn’t be a sustainable business model for the banks. The fact that you are current on your payments is going to make the bank prefer to keep things as they are.

So here you are with a closed account with a balance, at a bank you’re not fond of, and an interest rate that keeps going up. What to do?

The best plan would be to pay it off, of course. You could raise extra money by selling things, working more or going on a temporary austerity plan. It’s amazing what we can do to raise money if we are motivated enough. Pay the balance off, and say goodbye to the bank for good.

If you have equity in your home, or if you can borrow money from a close relative, you may want to consider getting a new loan at a low interest rate and pay off the card.

Another option, provided your credit is still good, is to pay off the debt with a 0 percent balance transfer card. There are some great balance transfer deals available right now, offering 0 percent interest for more than a year. As you work hard and scrimp to pay more every month, you’ll make a lot more progress if you’re paying no interest. And the fact that the 0 percent rate period is limited should motivate you to pay it all off – before the rates rise again.

See related: APRs to go up as Fed raises interest rates, Over your head in debt? 5 extreme budgeting ideas

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Updated: 11-14-2018