Why Did My Credit Card Interest Rates Increase?

Talia Lee-
June 13, 2024

As a credit card holder, you likely rely on your card’s terms to remain consistent. However, there are times when this doesn’t happen. For various reasons, your credit card issuer may increase your annual percentage rate (APR). This change can significantly impact your account.

Your APR determines your monthly payments and how quickly you can pay down your credit card debt. If your credit card APR has increased, you might be unsure of your options. Here’s what you can do if your issuer has increased your credit card APR:

Most credit card APRs are tied to the prime rate, which many lenders use for financial products like credit cards, mortgages, and auto loans. When the Federal Reserve adjusts the federal funds rate—the interest rate banks charge each other for overnight lending—it can affect variable-rate credit products, including your credit card APR.

When the federal funds rate increases, it’s known as a rate hike. In the spring of 2022, the Fed announced plans for several rate hikes over the year and beyond. Since March 2022, there have been 11 rate hikes, with the most recent increase of a quarter percentage point on July 26, 2023. On June 12, 2024, the Fed maintained its target range at 5.25 to 5.50 percent for the seventh consecutive time.

Even if the prime rate isn’t currently rising, that doesn’t mean it’s falling. Until rates start to decline, your card issuer might not adjust your APR, especially in terms of lowering it.

If you fail to pay your credit card bill on time, your card issuer might impose a penalty APR, which can be as high as 29.99 percent. Normally, your credit card starts with a regular variable APR, unless you have an introductory APR offer. Missing a payment could replace your regular or introductory APR with this penalty APR.

However, the penalty APR is usually not permanent. If you resume making timely payments, your card issuer should review your account and restore your regular APR.

If you signed up as a new cardholder and received an introductory APR offer, such as a 0 percent introductory APR, it’s possible that this offer has now expired. These promotional offers typically provide cardholders with a reduced interest rate for a set period. Once this promotional period concludes, your regular APR will take effect and apply to any remaining balance on your card.

If your credit score decreases, lenders may view you as a higher credit risk, prompting them to increase the APR on your borrowed money. Once your card issuer detects a decline in your score, they have the authority to implement a new, higher APR. You do retain the option to decline this increased rate once you receive notification of the impending change, although opting out could potentially lead to the closure of your account by the issuer.

Now that you’re aware of the reasons behind potential APR increases, let’s discuss proactive steps you can take when faced with this situation. By planning ahead and staying diligent, you can mitigate the impact of APR increases with these strategies:

The most effective way to mitigate the financial impact of a higher APR is to reduce or eliminate your credit card balance entirely. By reducing your balance, you decrease the amount you’ll owe in interest charges.

There are various ways to reduce your balance. Begin by refraining from making new charges on your card while aggressively paying down the existing balance. You can also explore earning additional income through side hustles or selling items around your home for extra cash. Many individuals have successfully employed these strategies with creativity and determination to pay off their credit card balances, and you can likely achieve the same results.

If you’re unable to pay down your balance quickly, consider transferring it to a credit card with a lower APR. This step can potentially save you hundreds or even thousands of dollars in interest.

Numerous credit cards offer introductory APR offers for balance transfers. Depending on the card, you might qualify for a 0 percent introductory APR on balance transfers or another APR lower than the national average.

It’s important to note that balance transfers usually incur fees. Many cards charge between 3 percent to 5 percent of the transferred amount as a balance transfer fee. To assess potential savings from a balance transfer, including these fees, you can use our balance transfer calculator.

If you’re grappling with substantial credit card debt, you might consider low-interest loans designed for consolidating larger amounts of debt. Personal loans typically offer lower interest rates compared to credit cards, though lenders in this sector often have stricter lending criteria. To qualify, you’ll typically need excellent credit, a low debt-to-income ratio, and a stable employment history.

Alternatively, if a personal loan isn’t feasible, you might explore borrowing against the equity in your home through a home equity line of credit (HELOC) or a cash-out refinance. These secured loans often feature lower interest rates compared to personal loans or credit cards.

However, it’s crucial to understand that secured loans tied to your home’s equity carry the risk of property loss if you default. While such a loan can be an effective strategy for consolidating high-interest debt, it demands careful consideration before proceeding.

If none of the aforementioned options are viable due to overwhelming debt and potential APR increases exacerbating the situation, credit counseling might be a suitable solution.

Engaging with a certified credit counselor from a nonprofit agency can assist in devising a budget and strategy to efficiently reduce high-interest debt. Depending on your circumstances, they may propose a debt management plan (DMP), bankruptcy, or alternative solutions.

When pursuing this path, it’s crucial to exercise careful scrutiny in selecting a credit counselor. Thoroughly vet their credentials, client feedback, and track record to ensure they have a reliable reputation and consistently deliver on their service promises.

If you decide against accepting the new interest rate offered by your issuer, you have the option to decline the rate hike or negotiate the terms. By declining, the issuer will usually close your account or instruct you to cancel it, as you’re unwilling to comply with the new rate.

Should you opt not to accept the rate increase, the issuer will inform you that you have 45 days from the notice date to cancel your account. However, the new interest rate will be effective 14 days from the notice date, meaning you can only make purchases at the old rate for up to 14 days following the notice.

It’s important to note that the issuer is not required to notify you of your right to cancel if the rate increase applies only to new transactions, or if the increase is due to being at least 60 days late with your minimum payment.

If you choose to negotiate with your issuer instead, there’s a chance you could successfully lower your rate again under certain circumstances. For instance, if your issuer increased your interest rate due to a late minimum payment, you can request a return to the lower rate once you’ve maintained timely payments for six consecutive months following the rate hike. You might also explain your financial situation to the issuer, which could lead them to offer a lower rate for a specified period, especially if you’ve been a loyal customer.

In the end, it’s always worth asking, so reach out to your issuer and try to speak with someone in their retention department before making a decision to cancel your card.

Seeing changes in your credit card terms can be unsettling, especially if they’re not in your favor. Even a slight increase in your card’s APR can translate to more money leaving your wallet.

Ideally, it’s best not to carry a balance on your credit card. However, if you find yourself with a balance when your APR goes up, there are several steps you can take to mitigate the impact. Fortunately, you have several options available to improve your situation, even if paying off your debt immediately isn’t feasible at the moment. You can consider transferring your balance to a card offering a lower APR, consolidating your debt with a low-interest loan, or seeking advice from a licensed credit counselor.

Before taking any action, it’s a good idea to reach out to your issuer directly and discuss your options. They may be able to offer a solution that could potentially lower your APR once again.

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