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FDIC Consumer News - Fall 2017

When and Why Your Credit Card Interest Rate Can Go Up

You may have heard news recently that interest rates are on the rise. That's good news for depositors wanting to earn more on their savings accounts. It also means that the interest rates charged on your credit cards may go up.

Most credit cards have a variable interest rate, meaning the rate will rise or fall based on changes in a particular "index" of interest rates nationwide (not something controlled by your card issuer). In addition, your card issuer can decide to increase your rate under certain circumstances. For example, a card issuer may raise your interest rate if you are 60 days or more late paying your credit card bill or if you have a significant drop in your credit score. If your card has a low introductory interest rate, the rate will increase once the promotional period ends. As for fixed-rate credit cards, the interest rate will not rise or fall with changes in any specific index, but the rate can go up for other reasons, such as late payments. (Note: Fixed-rate credit cards are very rare in the marketplace today.)

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Credit CARD Act) helps protect consumers from many instances of sudden interest rate increases. Under the law, your card issuer generally cannot raise the rate if you've had it for fewer than 12 months. Your card issuer also must provide you with a 45-day advance notice of a rate increase, which can only apply to balances going forward unless you are late paying your credit card bill by 60 days or more. Also, if your card issuer raises your rate because of a 60-day late payment, it must restore the original rate after six months of on-time payments.

What can you do to minimize an increase in your credit card interest rate and reduce the amount of interest paid on your credit card balance?

Pay your balance in full each month, if you can. "The best way to reduce the amount of interest paid on credit card balances is to pay as much of the total balance due as you can each month," said Ardie Hollifield, an FDIC senior policy analyst. “Your statement will provide you with what is referred to as a ‘minimum payment warning,' which shows you the amount of interest you will pay over time if you only make the minimum payment. This will almost always provide you with a clear incentive to pay more than the minimum required."

Pay attention to any notices of a rate increase from your card issuer. Be sure to carefully read all mail from your card issuer, including monthly statements and notices. "If you receive a 45-day notice of a rate increase, consider whether you can pay off the credit card balance and close the account before the increased interest rate becomes effective," said Sandra Barker, an FDIC senior policy analyst.

If paying the card balance in full before the rate increases is not an option, Barker said that within the 45-day period you could transfer the balance from a card with a high interest rate to a different card issuer with a lower interest rate, but you need to be careful. "In many cases, a balance transfer can be a good way to get your debt under control and pay it off faster, but before you move your balance you need to know exactly what you're getting into," she said. "Many credit card issuers offer introductory zero-percent deals in the hopes that you will move your money to them, but you may pay a significant fee for the transfer. If you don't pay off the balance within the introductory period you'll be charged retroactive interest for the entire amount of the transfer. In the end, if you don't reduce the new card's balance each month, you could end up even more in debt."

Avoid rate increases due to late payments. To avoid fees and unscheduled increases to your interest rate, as well as to maintain your credit rating, it's essential to make all payments by the scheduled due date.

For more from FDIC Consumer News on managing credit cards and dealing with debt problems, search by topic.