It’s important to determine the cause if you received notification from your bank that the annual percentage rate (APR) on your credit card is increasing or if you simply became aware of it. If you have a balance on your credit card, your APR will decide the interest fees you’ll have to pay. An increase in your APR may make it more expensive for you to make interest-only payments over time. Knowing the cause of your rate increase might help you decide whether there is anything you can do to lower it.
Why did the APR on my credit card rise?
Your rate could have gone up for a variety of reasons, though luckily less than before. Regarding interest rate increases, the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 added a number of new protections. For instance, the law stipulates that credit card companies can typically only raise your APR on purchases made going forward and during the current billing cycle—but not on outstanding balances from earlier months. Additionally, it did away with a practice known as universal default, which permitted credit card companies to increase your rate if you had previously defaulted on a loan from a different lender. Additionally, it outlawed clauses that allowed card issuers to alter your APR at any moment and for any reason.
Issuers of credit cards now have more limitations. Nevertheless, there are specific circumstances in which a credit card company may legitimately increase your rate, occasionally without informing you beforehand.
Your card was at a discounted rate.
For a specific number of months or payment cycles, credit cards with promotional rates let you benefit from low interest rates on purchases, balance transfers, or both. Your existing debt and any future purchases will be subject to the standard, higher APR once the promotional period has ended.
The duration of a promotional rate and the interest rate you will be charged after it ends must be disclosed by credit card issuers to customers.
To find out if a promotional APR is presently being applied to your transactions and any balances you might be carrying, check your credit card agreement or billing statement.
Your payment was received late.
The law mandates that if you make a mistake and pay a few days—or even a month—late, the card issuer must be understanding with your APR (though the card company can still hit you with a late fee). However, if you fall behind on your payments by 60 days or more, your credit card APR may rise to the penalty rate, which is ordinarily the highest interest rate mentioned on your card agreement.
The APR on the credit card is variable.
Your credit card’s APR may rise in line with an index rate it is connected to if it has a variable APR, as the majority do. The prime rate, which is the rate banks give their best clients, is frequently used as the index rate for credit cards with variable APRs.
The federal funds rate—the price banks charge one another for loans—is the basis on which banks calculate the prime rate. When the Federal Reserve talks about hiking interest rates, it’s talking about the federal funds rate, and eventually your credit card rate will follow suit. The issuing bank determines when to raise card rates. For instance, Capital One changes variable APRs at the start of every quarter, but Discover changes rates every month.
Your credit rating dropped
Your credit score might be lowered by having too many hard credit inquiries, late payments, or high credit card balances. (Hard inquiries occur when you apply for a loan or credit card.) Your credit card company may receive a warning if your credit score drops that you might have trouble making your payments in the near future. Your card issuer may increase your interest rate in response, but only after giving you 45 days’ notice.
Exist legislation regulating credit card interest rates?
As previously mentioned, the CARD Act establishes guidelines on when and how banks may raise a credit card holder’s APR. Although there is no federal law regulating credit card interest rates, several states may have their own regulations. For instance, the maximum interest rate that a credit card firm may charge may be governed by the state where its headquarters are located. Some military personnel also have access to restricted interest rates. The Servicemembers Civil Relief Act caps interest rates for credit card balances incurred previous to service at 6% for active duty service members.
How can I reduce my credit card’s APR?
Making six consecutive on-time payments will restore your previous interest rate if your APR was raised because a payment was more than 60 days overdue. Increasing your credit score can also qualify you for a cheaper interest rate, although you might need to petition your issuer for the reduction in rates.
How does the prime rate impact the APR on my credit card?
When the prime rate fluctuates, your credit card’s variable APR, which uses the prime rate as its index rate, will adjust accordingly. The prime rate, which is based on rates from at least 70% of the 10 major U.S. banks, is frequently cited by credit card issuers. It is reported in The Wall Street Journal.
