Debtors may be surprised to learn that credit card companies can alter the interest rates associated with their cards. This can obviously cause issues in managing debt, not to mention planning for future spending. Often the only notice a credit card holder will be given is a letter informing them of the change, without any indication that there is anything the debtor can do to halt the change in interest rate.
This is not the case, however – debtors do have a choice, and there are a few paths open to them when attempting to block forced interest rate revisions. In this article we are going to discuss these options in detail in the hopes that credit card holders can make an informed choice when reacting to such a scenario.
What Does it Mean to Raise Credit Card Rates?
As with any debt, a credit card has an annual interest rate attached to it. This is how creditors (those who lend the money) make their profits. For example, if a debtor spends $100 on their credit card, and that card has an interest rate – also known as Annual Percentage Rate (APR) – of 20%, then the debtor will have to pay the credit card company the $100 they used plus an extra $20 on top of that if the debt were to be paid back over 12 months.
In the aftermath of the 2008 economic crisis, many credit card holders have been shocked to find that the APR they were used to has been increased, sometimes by as much as 10%. On a debt as small as $10, this might not seem like a big deal, but when many credit card bills are for hundreds, if not thousands of dollars, it’s easy to see how a small change in APR could result in a burgeoning debt problem.
It should be noted that these changes in interest rates are not applied to every credit card holder, instead they are calculated based on a credit card company’s rate to risk policy. This means that they will alter the APR based on the credit rating of the debtor. Such a change in payment is unfair as it means a credit card customer could be a punctual and reliable credit card user, but because of some other credit issue, or because the company changes their rate to risk policy, then the debtor could be abruptly faced with unreasonable changes to their debt payments.
Understanding Why Rates Are Changing
Prior to the 2008 crash, creditors were handing out credit cards and other loans without due diligence, making it simple for potential debtors to secure cash flow if they required it. Fast-forward to 2014, and while the global marketplace has recovered to a degree, creditors are still reluctant to take chances with supplying credit lines to those in need, as they lost billions of dollars during the crash.
What does this have to do with credit card rate changes? In all honesty, everything. Not only have credit card companies looked to cease offering the types of higher risk loans which they have done in the past, but they have attempted to curtail existing
credit card holders who they feel are no longer worth having a debt agreement with. In other words, those they feel could struggle to pay off their debt. Effectively, those who are seeing credit card rate hikes would probably be turned down for the same credit card if they applied now from scratch. The unfairness of this is that it can happen to someone who has made all their payments on time and been a good customer.
Why, then, would credit card companies do this when it could put further financial strain on those they feel could struggle to pay back their debt? The reason is that lenders hope that an “undesirable” credit card customer will find the hikes too severe and will then transfer their debt to another credit card company or bank. The lender cannot lose in this situation because if the debtor does switch to another company then they will get the money they are owed from them via a debt transfer; alternatively, if the debtor does not switch credit card company, then it will be because they can pay the debt and the lender will make more money because of the interest rate hike.
This is highly unethical, and yet some creditors continue this policy, punishing respectable debtors by forcing them into a financially difficult situation where they either transfer the debt to another company, and in turn negatively affect their credit rating, or pay the rate rise which could put them under more financial strain than is necessary,
How to Beat Credit Card Interest Rate Hikes
Thankfully, debtors are not in a powerless situation, even if some unscrupulous creditors would like them to believe that they are. There are a number of options open to a debtor in this situation. Some of these options are more advantageous than others, but with any debt scenario it is important that the debtor take control and make the most informed, positive choice they can.
Let’s take a look at the most effective of these options, now:
While it might feel like giving in to the creditor, sometimes the best option is to switch debt. This can only be done with the correct amount of research, as a balance transfer should not be entered into lightly. In order to do this a debtor must compare a number of different bank loans and credit cards which offer balance transfers (a means to pay one debt with another). Once the cheapest has been found, this can then be contrasted with the existing credit card debt. A balance transfer should only be pursued if the APR and potential amount will be less than the credit card debt after the interest rate increase.
It is also possible to switch to a bank loan or credit card with a frozen interest rate, or, better still, a reduced interest rate for an extended period. This means that the the debtor can pay off the debt in that time without incurring any interest rate payments, alleviating their financial situation.
Unfortunately, this option is normally open only to those who have a good credit rating or a decent level of income. Sometimes a debt plan will need to be followed in order to increase a debtor’s credit rating first before securing a balance transfer. It should be remembered that even just applying for new credit can adversely affect a debtor’s credit score, so this should only be done if it looks likely that a new loan will be granted.
Lastly, if a debtor is struggling to make their payments at all, they should contact a not-for-profit debt counselling service first to assess their available options.
#2 Stop the Rate Hike
Depending on the region you live in, it may be possible to actually stop the interest rate change from happening at all. This will involve finding out about the debt legislation in your territory before preceding which can normally be acquired through contacting your local citizen’s advice bureau.
It many western countries there has been legislation put in place which helps debtors in this situation, although often this only delays the rate hike, it can still buy the debtor time and save them money while deciding on whether to seek a balance transfer or not. This applies mainly to variable credit card agreements, as in the past such agreements allowed creditors to alter their interest rates as much as they wanted.
There are a number of legislative powers open to debtors in regions such as the USA, Canada, France, and the UK. Such legislation is territory dependent, but many will include some form of the following:
- Force No Increase For One Year or Agreed Period: If a credit card company attempts to raise interest on a variable interest credit card, the first thing a debtor should do is consult their credit agreement. Most credit agreements now contain a clause where the creditor agrees to not raise interest for an extended period of time, usually 6, 12, or 24 months. It is not uncommon for creditors to attempt to renege on this clause if they hope to move a debtor away from their business. As this is a binding contract they cannot do this. A stern written letter from either the debtor or their legal representative should put an end to this immediately. However, it should be remembered that many of these clauses have a terms and conditions sub-clause. What does this mean? It means that the creditor is only bound by this if the debtor has followed the other terms and conditions. If a late payment, for example, has been made, then it is possible that the creditor is within their legal rights to make the interest rate change.
- Stop Subsequent Interest Rate Increases: There is normally also a clause within the debt agreement that once an initial legitimate interest increase has been made, that no additional raises should be made within an agreed time-scale. Often this means that a creditor cannot raise their interest rates for another 6 months. If a creditor has violated this agreement, the debtor should legally be able to stop another interest rate change as per their debt agreement. Again, this may be subject to the debtor having met all terms and conditions of the initial loan.
- Clarification For Rate Increase: Some territories allow the debtor to contact a lender to ask for a reason behind the interest rate change. If the reasoning does not seem transparent, or is as vague as “because of your credit rating”, then it may be possible to contact the relevant lending association or regulatory body to ask if this qualifies as fair treatment. Most western countries offer the protection that a debtor must be treated fairly, of course what this means in reality is open to debate, but it could result in the regulatory body stepping in to halt the interest hike.
- Protection For Those Struggling With Debt: Another common piece of legislation is to put in place the means to protect debtors from being taken advantage of by unscrupulous debtors. Despite this, many creditors continue to do so, and are able to simply because their customers are not aware that what is happening is either illegal or prohibited. Again, a debtor should look at their debt agreement, if there is a clause which states that the creditor will not raise or change the interest rate if the debtor is behind on payments, then this is most probably not a good will gesture – they are actually forbidden from doing so. This protects debtors from being pushed further into financial difficulty. This type of clause is not affected by the other terms and conditions, if such a protection is in place it is there no matter what. A debtor should ensure that the creditor is aware of this should they attempt to violate such an agreement.
#3 Debt Counselling
It’s been mentioned previously, but it cannot be overstated, non-profit debt counselling is often the most effective protection a debtor can give themselves against unfair interest rate changes. The important part to emphasize is “non-profit”. There are many debt counselling companies which will charge customers for their services, and in the worst instances actually put them into further debt. It is essential to ensure that the debt counsellor works either for a charity or a government debt initiative.
A creditor has to give the debtor a basic notice period for any interest changes, these are usually either 30 or 60 days in duration. This gives the debtor enough time to consult with a debt adviser to figure out what the best move may be. It could involve debt consolidation, which is a form of balance transfer where all debts are put together into one single, easy to manage payment. It could also involve entering into a negotiation phase with the creditor trying to find a more appropriate payment scheme.
When combating credit card interest rate changes, follow three simple rules:
- Keep everything in writing as a record of all communication, for future reference.
- Contact a debt adviser.
- Research local debt legislation.