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Default Credit Card Interest Rates to Increase Across US By Mid-May 2009

February 2009 was a month of change, but not the kind the average credit card holder needs. Credit card lenders spent the month advising tens of millions of customers across the US that their credit card interest rates were about to change. This article discusses these rate changes and the options available to credit card holders who carry a balance.

EXPECT INTEREST RATE INCREASE BY MID-MAY

A across-the-board increase in interest rates could prove to be a death blow to the finances of millions of Americans who are in debt and have lost their jobs. One could argue that for American corporations to betray the American people in this way, when taxpayers are called upon to bail out some of the largest and wealthiest financial institutions in the world, is not only unhelpful, but unpatriotic.

Still, it’s no exaggeration to know that these increases are bad news for the cardholder carrying a balance. The good news—if there is any—is that not all increases are effective immediately.

A typical letter informed a credit card holder that their interest rate would increase in about 90 days, and for many that was around mid-May 2009. So those card holders may still have time to formulate an escape plan.

Second, purchase rates – and the balance on the purchase segment of their credit card accounts – may not necessarily be affected, or not immediately. Most of these notices inform credit card customers that their “default” rates are going up.

MORE BRUTAL “DEFAULT PRICES”

Not every customer understands what a “default” rate is, or that not all credit card accounts have a default rate.

For those accounts that have a default rate, it is best described as a penalty rate. Higher than the rate the customer was paying, this is the new percentage to which the interest rate on the account “defaults” when the cardholder has breached the terms of the credit card agreement.

Being late paying twice a year is one example of what has caused an account to automatically default on the penalty rate in the past. With these delinquency rates getting more and more brutal – they can be 25% to 30% per year or even higher – being on time with every credit card payment will now be a matter of survival.

WHAT WILL TRIGGER DEFAULT PEACE

Generally, an event that results in a penalty charge can trigger a late rate. Such cases include late payment or exceeding the account’s credit limit. And while some account terms require two such incidents within a 12-month period, other accounts only require one.

CHECK YOUR STATEMENT FOR CHANGES

However, not only default rates are changing. Millions of customers whose accounts have had APRs of 7% to 8% over the past few years are also seeing rate increases. Usually the rate is doubled.

There are three credit segments on every credit card account (purchases, balance transfers, cash advances) and most often three different interest rates: the purchase rate, the balance transfer rate, and the cash advance rate.

The interest rate of any or all of these segments may be affected by this across-the-board increase. Any or all of these three may charge a higher rate if there is a “default rate clause” in the cardholder’s terms and conditions that is triggered by an event such as a late payment.

HOW TO RESPOND

Options are limited for most credit card holders at this point.

When a credit card company doubles the rate on balances it carries for a customer, that’s a signal they no longer have to worry about losing that customer.

As a result, such a customer is unlikely to be able to call and negotiate their way back to a lower rate, although they should definitely try. Be aware, however, that even if he gets the new rate “reduced”, it’s likely to still be higher than the rate he was paying before these changes took effect.

Most credit cardholders will need to choose one or more of the following options, which are described in more detail below.

• Pay off as much as possible using savings and/or other assets.
• If possible, transfer high-interest balances to low-interest accounts.
• Choose to “opt out” of the new terms BEFORE they take effect.

Additionally, it would be wise for every affected credit card holder to write to their representative in Congress with the following requests: 1) that the credit card reform legislation set to take effect in 2010 go into effect immediately, and 2) that interest rate increases be implemented as January 2009 undo.

YOU PAY OUT THE MOST

Obviously, if at all possible, the best course of action is to pay off any credit card balance before the new rate goes into effect. For those who carry balances and yet have savings to pay off those balances, paying off the debt is recommended.

While it’s scary to give up the nest egg in these economic times when layoffs are on the rise, it’s a smart thing to do when it means getting out of an interest rate below fifteen to thirty percent because it lowers the cost of living. For those who have no savings and yet may have other assets that can be exchanged for cash, again the advice is to do whatever it takes to get out from under the tyrant’s foot.

And as much as we Americans like to be independent, maybe it’s time to downsize and/or share living space to lower housing costs and then use the savings to become debt free.

HIGH INTEREST BALANCE TRANSFER

This is not the panacea it used to be. While it may still be possible to find a six-month or one-year 0% promotional offer, it may come with an upfront balance transfer fee that negates any savings. Credit card holders need to pull out their calculators and do some numbers to see if a balance transfer makes sense, as this is a temporary measure that buys time and nothing more.

A credit card holder who gets a great deal must expect a heavy shoe to drop after the promotional period expires. The non-promotional interest rate may actually be higher than what the credit card holder has escaped. Plus, if he’s late on a payment or goes over his limit during the promotional period, his rates can increase dramatically with just 15 days’ notice.

Once the balance is transferred, the credit card holder must put the card down and not use it unless there is a penalty clause for not using the card. If required to make at least one purchase per month with the card, the cardholder is encouraged to mark their calendar and use the card to purchase a cup of coffee once each billing cycle to avoid the penalty.

The number one goal for credit card holders during this time is to do everything in their power to pay off that balance before the rate increases.

“OPT-OUT” RATE INCREASE

When a credit card holder’s rates are scheduled to increase, they will usually be given an “opt-out option” that allows them to freeze the balance on their credit card account at the “old” or current rate they were paying. .

However, this requires the account to be closed for all purposes other than repayment. The credit card holder must also “opt out” BEFORE the date the rates change. If he opts out of the rate change and agrees to close his account, he will be able to top up his balance at the old rate.

Once his rates have been raised, it is too late to exercise that option.

CONCLUSION

Credit card providers are raising interest rates for tens of millions of credit card holders across the United States. Interest rates that may be affected on a Cardholder’s account may include any or all of the following: purchase rate, balance transfer rate, cash advance rate and/or late payment rate. Most of these increases will take place by mid-May 2009.

The options available to credit card holders with balances appear to be limited to: 1) paying off as much of their balances as possible before the new interest rates take effect, 2) trying to buy time to pay off their balances with the low interest promotional offer balance transfer and 3) “opting out” of the new rate in exchange for closing the account and paying off the balance at the last applicable interest rate.

However, there is nothing stopping the savvy credit card holder from combining strategies. He can do a balance transfer to an existing card that had a low rate (non-promotional) and then opt out of a rate increase on that card, provided he can do both before the date his new rate takes effect.

Credit card holders are also encouraged to write to their representatives in Congress and request that reform of the Credit Card Act, which is due to take effect in 2010, be enacted immediately and the 2009 interest rate increase be rolled back.

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