Prime Rate Decrease, Interest Rates Increase
Most variable-rate credit cards are tied to the prime rate, which has decreased 2.25 percentage points to 6 percent since September. But not all cardholders are experiencing a reduction in their credit card interest rates.
People with FICO scores above 700 are usually the only ones enjoying interest rate decreases. Riskier, or subprime, borrowers may instead face rate increases.
Industry analysts say that as the subprime crisis trickles down to the credit card portfolios within financial institutions, some issuers may attempt to offset losses when re-evaluating their credit card accounts.
In January, 2008, Bank of America sent notices to some credit cardholders telling them that their rates would rise to as much as 28 percent, even though many of those cardholders claimed they had a good payment history with the bank.
Last August, Capital One raised the interest rates of some of its cardholders to as much as 28 percent, according to the Los Angeles Times.
Why Your Rate May Increase
A clause in your terms and conditions may state that the issuer reserves the right to change your rate at any time for any reason. Some creditors may cite "general market conditions" when raising rates.
A falling credit score could also trigger a rate increase. Behavior that could cause your score to suffer includes charging high balances, paying late or missing payments.
Concerned consumers should call their issuers and ask what the policy is for increasing interest rates. Credit card agreements may also indicate the reasons issuers may increase your rate.
In light of tightening credit standards, experts advise not making any moves that issuers could flag as high-risk behavior, such as applying for numerous cards, charging more than 30 percent of your credit limit -- even if you pay off the balance each month -- or transferring balances frequently.
What To Do if Your Rate Rises
Read every piece of mail from your card issuer, even if it looks like junk mail. A rate adjustment notice may include an option to decline the increase -- by paying off your balance at the old rate and closing the account. You can also check your statement to see if your rate has climbed.
Negotiate. Before calling, shop around for competitive offers that you can cite, and check your FICO credit scores. A significant drop in your scores can cause a rate increase.
Work on paying down the balance or transfer it to another low-interest card. Watch out for pitfalls, such as balance transfer fees that don't have a maximum cap.