In the past few years, the Federal Reserve has focused its attention on the banking and credit card industries by tinkering with the laws that govern how lenders apply penalties, fees and interest rates. Gone are the days when banks imposed penalties such as large fines and huge leaps in the interest for just minor infractions. While the government oversight may have been justified, banks are in the business of making money and need to have some recourse against irresponsible consumers. Although their methods have been limited, there are still a few ways they can penalize consumers for their bad behavior.
One of the big changes in the banking industry was designed to keep consumers informed about the status of their credit card accounts. Calculating the particulars of an account was once the sole responsibility of the borrower, but thanks to the Credit CARD Act of 2009, lenders are now required to include payoff information in each billing statement. Consumers now know how long it will take to pay off the balance, if only the minimum due is paid each month, along with the total cost of paying off the debt over time.
Reasons for a Credit Card APR Increase
Legislative action has eliminated the predatory practice known as “universal default” that increased rates when a payment was made late to another lender. Creditors are no longer allowed to increase interest rates within the first year of an account’s opening, in most cases.
But credit card companies can continue to increase your rates when you’re 60 days late on any account they hold, go over the credit limit or write a bad check for payment. In addition, there are four other situations that allow a bank to increase the interest rate on a credit card account.
- Variable Rate Accounts – The interest rate varies depending on a flexible index like the prime rate. When the index rate increases, your variable rate will also increase.
- End of Promotional Rates – Introductory rates are teasers offered to new cardholders. When the rate expires, your credit card interest rate will increase.
- End of Debt Management Program – A rate increase is allowed when the end of a hardship arrangement has ended, such as a debt settlement program.
- Index Rate Increases – Rates based on the prime rate or other indexes are allowed to pass the increase on to their account holders.
Different Types of Interest Charges
Keep in mind that there may be different interest rates for the various types of transactions that you can do over and above making normal purchases. A promotional rate will be the lowest you pay and typically only lasts a short period of time. The standard rate is what you expect to pay once that introductory rate is over. The one to avoid is the default rate, the highest interest rate that applies to all balances as a penalty for being late or missing payments. Separate rates may be a condition of a balance transfer or for using a convenience check. The current national average annual percentage rate (APR) on new card offers is just under 15% (14.97%).
Don’t Be Trapped by Higher Interest Rates
When a credit card company raises your interest rates or initiates new fees, they must give you a 45-day written notice and the option to reject the new terms. If you decline the terms, you can continue to pay off the balance at the old rate, but you won’t be able to use the card to make any new purchases. If you accept the new terms, they only apply to future transactions you make with the card.
Interest rates are a necessary part of our free market, capitalist society. Banks lend money to turn a profit, which also encourages economic growth and a healthy consumer market. Savvy consumers should research all their options to lower the cost of borrowing — including comparing credit cards. But the best way to reduce costs is to pay off any interest bearing accounts in full each and every month. When that’s not possible, getting the lowest interest rate possible is the next best thing.
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