Are Credit Card Companies Raising Rates?

Overview

The mortgage collapse has devastated our nation's economy, and the credit crisis doesn't stop there. Banks are now targeting credit card holders in order to begin making up for losses. Even a customer with good credit and a history of paying off her debt is not immune to credit card companies raising her rates. The days of low annual-percentage rates are over for now, and the budgets of many Americans are becoming oversaturated due to high interest rates, fees and hefty monthly balances.

Identification

In order to understand what is happening in the credit card industry, it is important to discuss just what interest is and how it is calculated. Interest is a specific amount of money that is charged on the outstanding balance of your credit card. If you do not pay your bill off in its entirety before the next billing period, calculated interest will be added to your bill on the last day of every month. This interest is often calculated on a daily rate, in which the annual percentage rate (APR) is divided by 365 days. The daily rate is then multiplied by the average daily balance in order to determine your monthly interest that will be incurred. Therefore, the higher your APR, the larger your balance will grow on a month-to-month basis if you do not pay it off in full.

The Facts

The fact that credit card companies raise their rates is not news to customers, but what is surprising is that the credit card companies are raising the interest rates and lowering the credit limits of customers that have a record of paying their credit card bills on time and have even maintained an obvious level of credit worthiness. The banks that issue these credit cards justify such actions by stating that precautions of this type are necessary to guard against unexpected life changes such as unemployment and the economic downslide. Regardless of a customer's past relationship with her credit card company, there is still the possibility for default sometime in the future.

Effects

Credit card customers may see as much as a doubling of their interest rates as banks begin to tighten their lending practices in lieu of the financial crisis. The effect that these decisions will have on credit card holders can be disastrous. Some individuals who have gotten used to a 12-percent interest rate on their accounts will have to adjust to a 25-percent interest rate that can potentially add another $800 to their annual household budget.

Warning

The biggest downside for consumers is not just how much additional money it will cost in order to have credit card privileges, but the collateral damage that will be created. Since a credit card balance will grow with the addition of increased monthly interest rate charges, these balances will be reflected in the individual's credit report. When he tries to purchase a car or house, his debt to income ratio may be higher than expected, possibly having a negative effect on his ability to get additional credit for either one.

Expert Insight

Your open credit card accounts play a major role in your credit profile. If you are angry about a credit card company raising your interest rate and you are considering closing the account, don't do it. Believe it or not, voluntarily closing an account, even if you are in good standing, can hurt your credit score. Credit experts say that it is better to pay off the card and leave the account open and unused.

Misconceptions

You do not have to accept the interest rate increase. Many people do not understand this fact. You can opt out of the change, but keep in mind that you will have to reapply for a card if you want to stay with the company. By opting out, you will be expected to pay your present remaining balance at the rate that is already set, and your account will most likely be closed.

Are Credit Card Companies Raising Rates? by creditdebtconsolidating.com