A common question among credit cardholders is whether annual interest rates can change. The simple answer is an unequivocal yes. The only questions that remain to be answered are how, why, and whether there any specific regulations governing annual interest rate changes. Those regulations do exist thanks to the Credit Card Accountability Responsibility and Disclosure Act of 2009.
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Bear in mind that although card issuers express interest as an annual percentage rate, your credit card interest is still calculated on a monthly basis. Even if your annual rate goes up, it may not necessarily stay that way for a continual, 12-month period. It could still go up on a month-to-month basis depending on the terms and conditions of your particular credit card.
When Credit Card Companies Can Change Interest Rates
The federal regulations, which passed in 2009 and were implemented in 2010, make it clear that banks can raise interest rates at any time as long as they follow certain rules. In a summary of the regulations published by the New York City Department of Consumer Affairs, they point out that banks cannot raise interest rates on future purchases within the first year of issuing the card.
After that, they can raise them as they see fit as long as they give 45 days’ written notice to each affected cardholder.
There are exceptions to this rule including variable-rate cards, which fluctuate according to the Prime Rate, consumers who incur the penalty rate because of late or missed payments, or the expiration of an introductory rate. In all three cases, a bank can arbitrarily raise the interest rate without any further notice. The terms and conditions of such increases should be clearly spelled out in the disclosure paperwork provided with the credit card application.
Changing the Rates for Purchases You Made Last Year
Changing rates on past purchases is one of the practices that provided impetus for the new credit card regulations a few years ago. Prior to the legislation banks were able to do that legally.
Whenever an interest rate was raised, the new rate was applied to the current balance from that point forward, regardless of how much of that balance was incurred in the past. That is no longer acceptable under the law. If you were initially charged 15% on a vacation you took six months ago, your interest rate on those charges will not go up.
You might also be pleased to find that the new rules require banks to apply your monthly payments to the highest rate transactions first. In other words, if you were charged 15% for last year’s vacation but your current rate is now 17%; monthly payments you make are supposed to be first applied to all transactions at the 17% rate. Once those are paid off, funds can then be redirected to the 15% transactions. Prior to the changes, most banks did things just the opposite.
Paying Off Credit Cards with Changing Rates
The reality of credit cards is that banks make their money by charging interest. They also have set up a system whereby consumers who pay just the minimum monthly payment will end up paying significant amounts of interest and could potentially take years to pay off balances. To help educate consumers, the 2009 regulations made it a requirement for banks to print payoff information on every credit card statement.
On the Federal Reserve website, there is an example of how this information should look on a typical credit card statement. The example assumes a $3,000 balance with an APR of 14.4%.
Paying just the minimum monthly payment would result in more than $1,700 in interest and a period of 11 years to bring the balance to zero.
By increasing the monthly payment by $13, a consumer would pay just over $700 in interest and would have the debt settled in three years.
It is conceivable that consumers who pay just the minimum amount every month and are subject to annual rate increases could find themselves in the position of never fully paying off their credit cards. That’s why it’s extremely important to be careful how we use credit cards. Treating them as an unlimited supply of cash is perhaps the fastest and easiest way to get ourselves in way over our heads.
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