Default credit card interest rates will increase in the 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 notifying tens of millions of U.S. customers that their credit card interest rates were about to change. This article discusses these rate changes and the options available to the credit card holder who carries a balance.
EXPECT INTEREST RAISES BY MID-MAY
A widespread increase in interest rates could be a death blow to the finances of millions of Americans who have fallen into debt and lost their jobs. An argument can be made that for American corporations to betray the American people in this way, when taxpayers are being called upon to bail out some of the largest and wealthiest financial institutions in the world, is not only unhelpful, but unpatriotic.
Still, it doesn’t take hyperbole 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 take effect immediately.
A typical letter informs a credit card holder that their interest rate will go up in about 90 days, and for many that’s around mid-May 2009. So those cardholders may still have time to formulate an escape plan.
Second, purchase levels – and the balance carried 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 interest rates are going up.
MORE BRUTAL “DEFAULT INTERESTS”
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 interest rate the customer was paying, this is the new rate at which the interest rate on an account is “dropped” when the cardholder has breached the terms of their credit card agreement.
Being late twice in one year is one example of what has historically caused an account to automatically default to a penalty rate. As these interest rates are increasingly brutal—they can be 25% to 30% per year or even higher—making credit card payments on time will now be a matter of survival.
WHAT THE DEFAULT PERCENTAGE PROVIDES
Generally, an event that results in a penalty charge can trigger the default rate. Such events include late payment or exceeding the account’s credit limit. And while some account terms stipulate that there must be two such incidents within a 12-month period, other accounts only require one.
REVIEW YOUR STATEMENT FOR CHANGES
However, it’s not just the default rates that are changing. Millions of customers whose accounts have had 7% to 8% APRs over the past few years are also seeing increased rates. Usually the rate is doubled.
There are three credit segments (purchases, balance transfers, cash advances) for each credit card account, and most commonly three different interest rates: purchase rate, balance transfer rate, and cash advance rate.
The interest rate of any – or all – of these segments may be affected by these across-the-board increases. Any or all of these three may default to a higher rate if there is a “default rate clause” in the cardholder terms that an event, such as a late payment, triggers.
HOW TO REACT
Options at this stage are limited for most credit card holders.
When a credit card company doubles the interest on balances it carries for a customer, it’s a signal that no longer worried 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 price, although they should certainly try. Bear in mind, however, that even if he gets a ‘cut’ on the new rate, it will likely still be higher than the rate he was paying before these changes started.
Most credit card holders will need to choose one or more of the following options, discussed 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.
In addition, any affected credit card holder would be wise to write to their representative in Congress with the following requests: 1) that the credit card reform legislation scheduled to take effect in 2010 take effect immediately, and 2) the increase of the interest rate to be applied as from January 2009 to be cancelled.
PAY OUT AS MUCH AS POSSIBLE
Obviously, if at all possible, the best move is to pay off the credit card balance before the date the new rate goes into effect. For those who carry balances but have savings to pay off those balances, the advice is to pay off the debt.
While it’s scary to give up your nest egg in these economic times when layoffs are on the rise, it’s the smart thing to do when it means getting out of the fifteen to thirty percent interest rate because it lowers the cost of living . For those who have no savings but may have other assets convertible to cash, again the advice is to do whatever it takes to get out from under the tyrant’s foot.
And as independent as we Americans are, maybe it’s time to downsize and/or share living space to lower housing costs, and then apply the savings to get out of debt.
TRANSFER HIGH INTEREST BALANCES
It’s not the panacea it once was. 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 counters any savings. Credit card holders should get out their calculators and do some math to see if a balance transfer makes sense, as this is a temporary measure that will buy time and nothing more.
A credit card holder who gets a great offer should expect a heavy shoe to drop after the promotional period ends. The non-promotional interest rate may actually be higher than what the credit card holder escaped from. Plus, if he makes a late payment or goes over his limit during the promotional period, his rates can be drastically increased with just 15 days’ notice.
Once the balance is transferred, the credit card holder must put the card away and not use it, unless there is a penalty clause for not using the card. If there is a requirement to make at least one purchase per month with a card, the cardholder is advised to mark their calendar and once in each billing cycle use the card to buy a cup of coffee to bypass the penalty.
The number one goal for a credit card holder during this time is to do everything possible to pay off that balance before the rate is raised.
“WAIVER” OF RATE INCREASE
When a credit card holder’s rates are scheduled to go up, they will usually be given an “opt-out” that will allow them to freeze their credit card account balance at the “old” or existing rate they were paying.
However, this requires the account to be closed for all purposes other than repayment. Also, the credit card holder must “opt out” PRIOR to the date the rates will change. If he opts out of the rate change and agrees to have his account closed, he will be able to pay off his balance at the old rate.
Once his rates have been raised, it’s too late to exercise that option.
Credit card lenders are raising rates for tens of millions of credit card holders in the United States. Interest rates that may apply to a Cardholder’s account may include any or all of the following: purchase rate, balance transfer rate, cash advance rate and/or default rate. Most of these increases will be in effect by mid-May 2009.
The options available to credit card holders who carry 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 in which to pay off their balances with low-interest balance transfer promotional offers and 3) “waive” the new rate in exchange for closing the account and paying off the balance at the last effective interest rate.
However, there is nothing stopping the experienced 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 waive the rate increase on that card, provided he can do both before the date his new rate comes into force.
Credit card holders are also advised to write to their representatives in Congress and demand that the credit card reform legislation due to take effect in 2010 be passed immediately and that for 2009 the interest rate increase be cancelled.
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