Understand Interest Rate Increases

There was a time when credit card issuers could raise credit card interest rates whenever they wanted and keep your interest rate at that higher level for the duration of your credit card. Fortunately, the Federal government put laws in place that limit the times that banks can raise interest rates. In certain cases, credit card issuers must lower your interest rate back to previous level.

When Can Banks Raise Your Interest Rate

Federal rules gives guidelines for when credit card issuers can raise and when they must lower interest rates again.

Your interest rate can increase at specific times:

• If you’re more than 60 days late on your credit card payment.
• If you’re under a debt management plan and the plan is completed or gets canceled.
• When a promotional interest rate expires.
• Or, the index for a variable interest rate increases.

If your interest rate increases because you were delinquent on your credit card payment, it can only remain at that higher rate for six months. If you make your payment on time for six consecutive months, the credit card issuer is required to review your account and lower your rate to what it was before your payments were late.

Advanced Notice for Fixed Rate Increases

When you have a fixed credit card interest rate, meaning your interest rate isn’t tied to an underlying index, your credit card issuer has to tell you before they raise your interest rate. The card issuer must send a 45-day advance notice before the higher rate goes into effect.

This advance notice must tell you the new rate and let you know your right to opt-out of the interest rate increase. In that 45-day window, you can pay off your balance, opt-out of the interest rate increase, or you can do nothing and the new rate will go into effect on your credit card balance.

Opting Out of Rate Increases

If you choose to opt-out, your rate won’t increase and you’ll have the opportunity to pay off your balance at your current interest rate. However, your credit card issuer may close your account if you reject the new rate. If your interest rate increases, the new rate will apply to balances charged after the rate increase.

The credit card issuer doesn’t have to send an advance notice if a variable interest rate is increasing because the underlying interest rate is increasing. For example, if your interest rate is tied to the federal prime rate, your card issuer won’t send you a notice that your rate is going up because the prime rate goes up. Instead, you’ll have to pay attention to interest rate news to know when your rate is increasing.

No Rate Increases in the First Year

Bank cannot increase credit card interest rates in the first 12 months of the credit card unless a promotional rate expires. So, after you apply for a credit card, you get to enjoy that interest rate without the risk of having it increase. This rule doesn’t apply to variable interest rates.