February, 2009 was a month of change, yet not the type that the average credit cardholder needs. Credit card lenders spent the month advising tens of millions of customers across the U.S. that their credit card interest rates were about to change. This article discusses these rate changes and the options available for the credit cardholder who carries a balance.
EXPECT INTEREST RATE INCREASES BY MID-MAY
The across-the-board increase in interest rates may prove to be a death blow to the finances of millions of Americans who are in debt and have lost their jobs. An argument could be made that, for American corporations to betray the American people in this way, when taxpayers are being called to bail out some of the largest and richest financial institutions in the world, is not just unhelpful, but unpatriotic.
Yet, no hyperbole is required to know that these increases are bad news for the cardholder who carries a balance. The good news – if there is any – is that not all increases are effective immediately.
The typical letter has informed the credit cardholder that his interest rate is going up in about 90 days and, for many, that’s around the middle of May, 2009. So those cardholders still may have time to formulate an escape plan.
Second, purchase rates – and the balance carried on the purchase segment of their credit card accounts – will not necessarily be affected, or not right away. Most of these notices are informing credit card customers that their “default” rates are going up.
MORE BRUTAL “DEFAULT RATES”
Not every customer understands what a “default” rate is, or that not all credit card accounts have a default rate.
For those accounts that do have a default rate, it is best described as a penalty rate. Higher than the rate that the customer has been paying, it is the new percentage to which the interest rate on an account “defaults” when the cardholder has violated the terms of his credit card agreement.
Being late with a payment twice in one year is one example of what has, in the past, triggered an account to automatically default to a penalty rate. Since these default rates are increasingly brutal – they can be 25% to 30% per year or even higher – being on time with each credit card payment will now be a matter of survival.
WHAT TRIGGERS A DEFAULT RATE
In general, an event that results in a penalty fee can trigger the default rate. Such events include being late with a payment or exceeding an account’s credit limit. And, although some account terms stipulate that there must be two such incidents in a 12-month interval, other accounts require only one.
EXAMINE YOUR STATEMENT FOR CHANGES
However, not only default rates are being changed. Millions of customers whose accounts have had a 7% to 8% APR for the last few years are also having their rates increased. Typically, the rate is being doubled.
There are three credit segments (purchases, balance transfers, cash advances) on every credit card account and, most typically, three different interest rates: purchase rate, balance transfer rate, and cash advance rate.
The interest rate on any – or all – of these segments may be affected by these across-the-board increases. Any or all of those three can default to a higher rate should there be a “default rate clause” in the cardholder’s terms that an event, such as a late payment, triggers.
HOW TO RESPOND
Options at this point are limited for most credit cardholders.
When a credit card company doubles the rate on the balances it is carrying for a customer, that’s a signal that it is no longer worried about losing that customer.
As a result, it is unlikely that such a customer will be able to call and negotiate his way back to a lower rate, although certainly he should try. Be aware, however, that even should he get the new rate “lowered,” it is likely to still be higher than the rate he was paying before these changes began.
Most credit cardholders will need to pick 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 come into effect.
Plus, every credit cardholder affected would be wise to write to his Congressional representative with these requests: 1) that the credit card reform legislation slated to go into effect in 2010 be made effective immediately, and 2) that the interest rate increases being implemented as of January 2009 be rolled back.
PAY OFF AS MUCH AS POSSIBLE
Obviously, if at all possible, the best move is to pay off any credit card balance prior to the date on which the new rate takes effect. For those who carry balances, yet who have savings with which they can pay off those balances, the advice is to pay off the debt.
While it’s frightening to give up a nest egg in these economic times when layoffs are increasing, it’s the smart thing to do when it means getting out from under an interest rate of anywhere from fifteen to thirty percent because it reduces the cost of living. For those who have no savings, yet may have other assets convertible to cash, again, the advice is to do whatever is necessary to get out from under the tyrant’s foot.
And, as independent as we Americans like to be, it may be time to downsize and/or share living space in order to reduce the cost of housing, and then apply the savings toward becoming debt free.
TRANSFER HIGH INTEREST BALANCES
This is not the panacea it once was. While it may be possible to still find a six-month or one-year 0% promotional offer, it may come with an upfront balance transfer fee that contravenes any savings. Credit cardholders must pull out their calculators and do some number crunching to see whether a balance transfer makes sense since it is a stop-gap measure that will buy time and nothing more.
The credit cardholder who gets a great offer must expect a heavy shoe to drop after the promotional period expires. The non-promotional interest rate may, in fact, be higher than the one the credit cardholder escaped. Plus, should he be late with a payment or go over his limit during the promotional period, his rates may be raised dramatically with just a 15-day notice.
Once a balance is transferred, the credit cardholder must put the card away and not use it, unless there is a penalty clause for not using the card. Should there be a requirement to make at least one purchase per month on a card, the cardholder is advised to mark his calendar and, once in each billing cycle, use the card to buy himself a cup of coffee in order to circumvent the penalty.
Goal number one for the credit cardholder during this time is to do anything he or she can to pay that balance off, before the rate is raised.
“OPTING-OUT” OF THE RATE INCREASE
When a credit cardholder’s rates are scheduled to be raised, he will, typically, be given an “opt out option” which will allow him to freeze the balance on his credit card account at the “old” or existing rate that he had been paying.
This, however, requires that the account be closed for all other purposes except repayment. Also, the credit cardholder must “opt out” BEFORE the date upon which the rates are going to change. Should he opt out of the rate change and agree to have his account closed, he will then be able to pay down his balance at the old rate.
Once his rates have been raised it is too late to exercise this option.
Credit card lenders are raising interest rates for tens of millions of credit cardholders across the United States. The 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 default rate. Most of these increases will be in place by the middle of May, 2009.
The options available to credit cardholders who are carrying balances appear limited to: 1) paying off as much of their balances as possible before the new interest rates take effect, 2) attempting to buy time in which to pay off their balances with low-interest promotional balance transfer offers, and 3) “opting out” of the new rate in exchange for closing the account and paying the balance off at the last interest rate in effect.
There is, however, nothing to prevent the savvy credit card holder from combining strategies. He can do a balance transfer to an existing card that has had a low rate (not promotional) and then opt out of the rate increase on that card, provided that he can do both before the date on which his new rate comes into effect.
Credit cardholders are also advised to write to their Congressional representatives and ask for credit card reform legislation, slated to go into effect in 2010, to be enacted immediately, and for 2009 interest rate increases to be rolled back.