Default interest rates on credit cards will increase in the US in mid-May 2009

February 2009 was a month of change, but not the kind that the average credit card holder needs. Credit card lenders spent the month informing tens of millions of US 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 carrying a balance.

EXPECT INTEREST RATE INCREASES IN MID-MAY

The widespread 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. One could argue that for corporate America to betray the American people in this way, when calling on taxpayers to bail out some of the world’s largest and wealthiest financial institutions, is not only pointless, it’s unpatriotic.

However, it doesn’t take any hyperbole to know that these increases are bad news for the cardholder carrying a balance. The good news, if any, is that not all boosts are effective right away.

The typical letter informs the credit cardholder that their interest rate will increase in about 90 days, and for many, that’s mid-May 2009. So cardholders may still have time to formulate an escape plan.

Second, purchase rates, and the purchase segment balance of your credit card accounts, will not necessarily be affected, or not right away. Most of these notices inform credit card customers that their “default” rates are going to go up.

MOST BRUTAL “DEFAULT RATES”

Not all customers understand 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 rate the customer has been paying, it is the new percentage at which an account’s interest rate “defaults” when the cardholder has violated the terms of their credit card agreement.

Being late on a payment twice in a year is an example of what, in the past, has caused an account to automatically adjust to a penalty rate. With these default rates getting more and more brutal, they can be 25% to 30% per year or even higher, being on time with every 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 on a payment or exceeding an account’s credit limit. And while some account terms stipulate that there must be two such incidents within a 12-month interval, other accounts require only one.

REVIEW YOUR RETURN FOR CHANGES

However, it’s not just default rates that are being changed. Millions of customers whose accounts have had 7% to 8% APRs over the past few years are also raising their rates. Usually the rate is doubled.

There are three segments of credit (purchases, balance transfers, cash advances) on every credit card account, and typically three different interest rates: purchase rate, balance transfer rate, and cash advance rate. .

The interest rate in any or all of these segments may be affected by these generalized increases. Any or all of those three may have a higher default rate in case there is a “default rate clause” in the cardholder terms that triggers an event, such as a late payment.

HOW TO RESPOND

Options at this point are limited for most credit card holders.

When a credit card company doubles the rate on the balances it carries for a customer, it is a sign that he is no longer worried about losing that client.

As a result, it is unlikely that said customer will be able to call and negotiate his return at a lower rate, although he should certainly try. Keep in mind, though, that even if he “lowers” the new rate, it will likely still be higher than the rate he was paying before these changes began.

Most credit card holders will need to choose one or more of the following options, which are discussed in more detail below.

• Pay 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 go into effect.

Additionally, all affected credit card holders would do well to write to their representative in Congress with these requests: 1) that credit card reform legislation scheduled to take effect in 2010 be made effective immediately, and 2) ) that interest rate increases are implemented as January 2009 reverses.

PAY AS MUCH AS POSSIBLE

Obviously, if possible, it’s best to pay off any credit card balance before the date the new rate goes into effect. For those who carry balances, but have savings with which to pay off those balances, the advice is to pay off debt.

While it’s scary to give up savings in these economic times when layoffs are on the rise, it’s the smart thing to do when it means getting out of a fifteen to thirty percent interest rate because it lowers your cost of living. For those who don’t have savings, but may have other cash-convertible assets, again, the advice is to do whatever it takes 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 to lower housing costs and then apply the savings to get out of debt.

TRANSFER HIGH INTEREST BALANCES

This is not the panacea it once was. While it’s still possible to find a six-month or one-year 0% promotional offer, it may come with an up-front balance transfer fee that contravenes any savings. Credit card holders should get out their calculators and do some number crunching to see if a balance transfer makes sense, as it’s a stopgap measure that will buy time and nothing more.

The credit card holder who receives a great offer should 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 card holder got away with. Plus, if you’re late on a payment or go over your limit during the promotional period, your rates can increase dramatically with just a 15-day notice.

Once a balance has been transferred, the credit card holder must keep it and not use it, unless there is a penalty clause for not using the card. In the event there is a requirement to make at least one purchase per month with a card, the cardholder is encouraged to mark their calendar and, once each billing cycle, use the card to purchase a cup of coffee for avoid penalty.

The number one goal for the credit card holder during this time is to do everything possible to pay off that balance before the rate increases.

“DEACTIVATION” OF THE RATE INCREASE

When a credit card holder’s rates are scheduled to increase, they will typically be given an “opt-out option” that will allow them to freeze the balance on their credit card account at the “old” or existing rate that had been paying. .

This, however, requires the account to be closed for all other purposes except reimbursement. In addition, the credit card holder must “opt out” PRIOR to the date the rates are to change. If he opts out of the rate change and agrees to have his account closed, then he will be able to pay his balance at the old rate.

Once your rates have been raised, it is too late to exercise this option.

CONCLUSION

Credit card lenders are raising interest rates for tens of millions of credit card holders across the United States. Interest rates that may be affected on the 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 in 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 to pay off their balances with low-interest promotional balance transfer offers; and 3) “opt out” of the new rate in exchange for closing the account and paying off the balance at the last current interest rate.

However, there is nothing to prevent the smart credit card holder from combining strategies. You can make a balance transfer to an existing card that has had a low (non-promotional) rate and then choose not to increase the rate on that card, as long as you can do both before the date your new rate takes effect .

Credit card holders are also advised to write their representatives in Congress and ask for credit card reform legislation, scheduled to take effect in 2010, to be enacted immediately and for the increases to be reversed. of 2009 interest rates.