There are few moves a credit card issuer can make that will upset its customers more than an interest rate increase. After all, from a consumer standpoint it feels pretty unfair for a credit card company to seemingly change the rules of play after the game has already begun. Unfortunately for consumers, however, the truth is that your credit card issuer actually is within their rights to bump up the interest rate on your account, maybe even retroactively, as long as they follow a specific set of guidelines.
Who Makes the Rules?
Prior to the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (the CARD Act), credit card companies were allowed considerable freedom and flexibility with regard to interest rate increases. However, the CARD Act now protects consumers from actions that were previously deemed by Congress to be unfair on the part of credit card issuers. The act did not do away with interest rate hikes – that is a myth – but it did introduce a list of stipulations that must be followed in order for an APR increase to be legal.
1. Advance Notice
Credit card issuers are required to give you a heads up in writing at least 45 days in advance if they plan to increase your interest rate. Keep in mind, however, that if you are not abiding by the terms of your agreement and are missing payments then it is perfectly legal for your APR to be increased without any advanced notice whatsoever. And ignoring the notice doesn’t prevent the issuer from moving ahead with the rate increase.
2. Retroactive Increases Limited
The term “universal default” refers to the previously common practice whereby credit card issuers would increase the interest rate charged on your future purchases and existing balances. Rates were generally increased to the “default” rate, which tended to hover around 30%. One of the biggest achievements of the CARD Act, from a consumer standpoint at least, was the limitation placed on the practice of retroactive rate increases.
For example, thanks to the CARD Act any increase in your interest rate can only be applied to new debt, not to existing debt. However, if you become severely delinquent on your credit card account then all bets are off. When severe delinquency occurs your credit card issuers are still well within their rights to increase your rates, both on existing balances and future purchases.
3. Opting Out
If your credit card issuer sends you notice of an impending rate increase the CARD Act gives you the right to “opt out” of the change. However, before you become too excited you should remember that your credit card issuer also has the right to close your account and to accelerate the payback of your outstanding debt if you choose to opt out.
4. New Account Increase Restrictions
Newly opened credit card accounts are afforded some special protections thanks to the regulations imposed under the CARD Act as well. Credit card issuers are not permitted to raise your interest rate during the first 12 months after your account is open. Of course, the exception to this rule still comes into play if you become 60 days or more past due on a new credit card account. However, even if you do become 60+ days late your credit card issuer is required to give you the chance to earn back your original rate if you bring the account back to current status and continue to make all future payments on time for the next 6 months.
The bottom line is that the CARD Act does, in fact, levy some restriction on card issuers that want to increase you APRs. But, in most cases they’ll still be able to do so as long as they provide you with the required notice or if you’re delinquent on your payments. Of course, interest rates are only important if you carry a balance so if you’re able to pay your balance in full each month then your APR becomes meaningless.