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Credit Card Interest Rate Hike? Four Things To Know about Opting Out

by Barbara Marquand

Think you have the best credit card?  Maybe...until your card issuer tries to raise your rate!

However under the new federal credit card regulations, you can opt out of a credit card account if the card issuer proposes interest rate and fee hikes that you deem too pricey. Before you call your credit card company to cancel, though, understand the rules and implications of closing the account.

Here's what you need to know:

1. The Credit Card Opting-out Rules

Card issuers must give you 45 days notice before raising credit card interest rates or fees, such as annual, balance-transfer, and late fees. If you don't like the new terms, you can close the account during that time.

2. Impact on Your Credit Score

Closing the account does not count as a default, but it still could impact your credit score by increasing your credit usage rate, one of the factors used to determine your score. Your credit usage rate is the amount of debt you carry compared to the amount of your available credit. Closing a credit card account lowers your available credit, thereby increasing your credit usage ratio. To avoid this scenario, look for better credit card deals and secure a new card before closing an account, or quickly pay down your outstanding balances.

3. Credit Card Payback Time

You won't have to pay off the entire balance at once when you close the account, but your minimum monthly payment could go up. The credit card company has two choices in structuring payment of your remaining balance. It must either give you at least five years to repay, or it can charge a minimum monthly payment that is no more than twice the balance percentage of the old minimum monthly payment. For instance, if your old minimum monthly payment was 2 percent of the balance, the new monthly minimum payment can be no more than 4 percent of the balance.

4. Not All Credit Card Changes Require Advance Notice

Beware that credit card companies don't have to give you 45 days notice before lowering your credit limit or canceling your card. If that happens, Consumer's Union suggests asking the credit card issuer for an explanation and then paying down balances as much as possible to maintain a low credit usage ratio and protect your credit score.

Published 07/26/11 (Modified 07/09/14)

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