Can Your Credit Card Company Raise Your APR Out of Nowhere?
When you get the notice that your credit card interest rate is increasing, it's unsettling.
Your first reaction: "Why?"
There are many reasons that your credit card issuer is hiking the APR.
You may even wonder if they're legally allowed to pull such as stunt on you because you understand that a higher APR is not helping your battle to pay down the account balance.
Definitely Possible
In short:
Yes, your credit card issuer can raise your credit card interest rate at any time.
Even if you sign up for a card because of its interest rate, that rate could change.
You need to pay attention to each of your credit cards to make sure that their interest rates aren’t changing.
If they do, you need to keep track of what each card’s interest rate.
Why Will Your APR Increase?
There are a few things that may cause an increase in a credit card’s APR.
Late payments
Credit card issuers are heavily invested in getting back the money that they loaned to you.
Each month, you get a bill with your balance information, a minimum payment amount, and a payment due date.
If you miss that due date, the interest rate of your card could go up. This is known as a penalty APR.
The card issuer punishes you for making a late payment in hopes that the potential for punishment will convince you to make every payment on time.
Penalty APRs apply to both your existing card balance and any new balance that you add to the card.
Penalty APRs can be as high as 30% or higher, much higher than most credit cards will charge normally. According to CardRates, the average credit card APR is 17.08%.
You might find your monthly payment increase by a huge amount if you wind up paying a penalty APR.
The good news:
Penalty APRs aren’t permanent.
If you make six on-time payments, your card issuer is required to lower your credit card’s interest rate back to normal.
While it’s best to avoid missing payments, knowing that there’s a light at the end of the tunnel can help you get back on track if you do wind up with a penalty APR on your card.
Credit score drop
When you apply for a credit card, the card issuer will get a copy of your credit report and use the information on it to decide whether to approve your application.
Many cards offer different interest rates based on your credit score.
The same card might offer interest rates of 9.99%, 12.99% and 15.99% for people with excellent, great, and fair credit scores respectively.
Each month, your card issuer reports information about your credit card to the credit bureaus.
Occasionally, the card issuer may take a look at your credit report to make sure there are no major changes.
Unfortunately...
If there’s been a significant drop in your credit score, your card issuer might increase your APR.
This compensates for the increased risk that the card issuer is taking on by continuing to lend to you.
Increase in the federal funds rate
Interest rates for loans aren’t invented out of thin air.
There is a complicated interest rate market that affects the interest rate of everything from savings accounts to bonds, mortgages to credit cards.
Why?
It all has to do with the Federal Funds Rate.
By law, banks must keep a certain percentage of their customers’ deposits on-hand. They are allowed to use the rest of the money to make loans and other investments.
Each night, some banks have a little bit less than required and other banks have a bit more than required.
The banks with extra will lend money to the banks with shortages, overnight. The rate at which these loans are made is the Federal Funds Rate.
The Fed sets a target for the Federal Funds Rate and uses various tools to influence the rate that banks lend to each other overnight.
In the end...
If the Fed sets a higher target for the Federal Funds Rate, that trickles down to interest rates across the market.
You might see a small increase in your credit card’s APR if the Federal Funds Rate increases.
Notice
Your credit card company will inform you of any major changes to your credit card’s APR.
The Truth in Lending Act requires that you be provided with at least 45 days of notice of the increase.
The rate increase will take effect after 45 days for existing balances.
The increased rate can take effect for new purchases 14 days after the notice was sent.
Close the account to lock in APR
If you are notified that your card’s interest rate is increasing, you have one option that will let you keep your current rate.
You can notify your card issuer that you would like to close your account and keep your entire balance at the lower rate.
If you do this, you’ll lock in your current rate, but won’t be able to make new purchases with your credit card.
This can be worth doing if you have a large balance or the interest rate increase is large.
What Can You Do?
If your credit card issuer is increasing your card’s APR, try these tips to avoid paying extra interest.
Call and ask for a lower rate
One thing that you can try is calling your card issuer to request a lower rate.
Don’t expect the issuer to simply agree though.
You’ll have to make your case.
Try to pay down some of your balance before making the call.
Also, make sure to update your annual income and other financial information on file with the card issuer. Prove to the card issuer that you aren’t a risky borrower by showing that you have the wherewithal to pay the balance off.
The worst that can happen is the lender will say no, so you have nothing to lose by trying.
Balance transfer
Many credit cards are designed for people who want to transfer other card balances to a new card.
You can take advantage of these deals to avoid paying the increased interest rate.
In fact:
You might be able to secure an even lower rate than you originally had.
Balance transfer cards offer a promotion that will either waive the balance transfer fee or offer a reduced interest rate on balance transfers. Some offers will actually do both.
Many balance transfer card offers give you 12 to 24 months of 0% APR. If you can transfer your balance to one of these cards and pay the full balance in that time, you can save a lot of money.
It might be worth looking into one of these offers even if your current card’s APR isn’t going up.
Refinance or consolidate
If you don’t want to try a balance transfer card, consider a personal loan for refinancing or debt consolidation.
Personal loans tend to have lower interest rates than credit cards do and paying off credit cards is a common use for personal loans.
- Take out the loan and use the money to pay off your existing credit card debt.
- You’ll then pay off the new personal loan, which will have a lower interest rate.
You can even use the money to pay off multiple cards, consolidating multiple debts into one.
This can help you save money on interest and reduce the number of monthly bills you have to handle.
If you’re having trouble making your minimum card payments, using a personal loan with a long-term can reduce your monthly payment.
However, longer-term loans result in higher interest costs, so balance the costs with the benefits.
Nothing
Another option that you have is to do:
Nothing.
If you pay your credit card off in full each month, you never pay interest anyway.
If you don’t pay interest, you have no reason to care about the APR of your credit card.
In fact, it might be best for you to do nothing and to continue using the card as you were.
Many of the credit cards with high interest rates offer the best rewards. Giving up these rewards because of an increase in APR doesn’t make sense, assuming you always pay your bill in full.
Conclusion
Credit card companies are free to increase your credit card’s APR whenever they’d like, but that doesn’t mean you can’t do anything about.
Keep track of each of your cards so you know when an interest rate increase is coming.
Staying on top of things can help you react properly and avoid paying unnecessary interest charges.
