Before 2010, credit card companies could raise your interest rate on existing balances. If you have multiple interest rates on one credit card, likely because of a balance transfer, your lowest rate balance would be paid off first. You could be charged interest on a balance this month for an amount you paid off last month. Your interest rate could be raised based on your overall credit history, even if you have history of paying on time on your card. (For more on balance transfers, checkout Shuffle Away Your Debt With Balance Transfers.)
While all of these practices were reversed in 2010, there's a caveat on certain regulations - banks can make changes to your credit card agreement on future purchases if you are notified in writing. If you never read credit correspondence, it's time to start. What's contained could cost you money in interest, late fees or a letter can indicate a new annual fee that was never charged before. (For more on credit card agreements read Watch Out For Changes In Credit Card Agreements.)
How Notification Works
Your credit card company can notify you of major rule changes with a written letter 45 days before the change is made. This letter can come by itself or as part of your statement. If the notification is part of your statement, it must be on the front page or a separate page from other information.
Pay Online, But Open All Mail
Online bill pay is invaluable for keeping track of payments made. However, you need to develop a habit of opening all correspondence.
But what if your credit card company sends you seemingly endless offers? You can request your credit company to limit correspondence, but you still have to open everything. You never know when it could be a mailer containing a new annual fee.
What Could Be Changed?
Contract terms could change including annual fees, late fees, interest rates, and the billing error notification process. You could have great credit and never had an annual fee in your life. But if you don't respond to a notice from your credit card within 45 days, it's assumed you agreed to the fee.
Indexed Rates Can Always Change
Not all credit card agreement changes are cause for alarm. Regardless of your stated variable interest rate, your interest rate can adjust up or down with the economy. However, your rate must only change as much as the index changes.
Since the prime rate is based on the best rate currently offered by banks to it best customers, it could change month-to-month. For instance, if next month the prime rate is 5%, then your interest rate is changed on future purchases and existing ones by 1.5%.
Interest Rate Changes Not Requiring Notice
Besides changes due to an indexed rate such as prime, interest rates can change on existing balances for the following reasons: a temporary interest rate lasting at least six months expires; the minimum payment has not been received within 60 days after the due date; the consumer successfully completes or fails to comply with the terms of a workout arrangement or the rate on an existing balance has been reduced pursuant to the Service Members Civil Relief Act (SCRA). The card issuer can increase that rate once the SCRA ceases to apply.
Changes that Can't be Reversed with Notice
These changes can't be reversed with notice:
- Your statements are required to state how long it will take to pay off your balance if you make minimum payments.
- Double-cycle billing is eliminated. The interest you are charged for a billing cycle is based on your average daily balance for the stated billing cycle and not the previous one.
- Any amount you pay over the minimum monthly payment required will go towards your highest interest rate.
Like any other consumer product, you do have choices when it comes to credit cards. Consider these options if you're notified of a change in your credit card agreement:
- Transferring Balances
If you don't like the rules on one card, you could transfer your balance to one of your other cards. However, beware that the card to which you transfer your balance could require a balance transfer fee or change certain credit card terms with notice.
- Paying off and Closing Cards
What's the best way to avoid paying annual fees on your credit card? Pay off your credit card and close it. But before you close it, make sure it's not your oldest account. Closing your oldest credit card can result in a lower credit score in the long term.
- Paying off Credit Cards and Leaving It Open
Once you have a zero balance, you can pay it off each month and solely collect rewards instead of paying interest. This strategy is best used when you don't have an annual fee or are successful negotiating terms. (For more on credit card rewards, read Credit Card Perks You Never Knew You Had and Get A Free Ride From Credit Companies.)
- Negotiating Terms
If you have a solid payment history, you can always call your credit card companies and ask for annual fee waivers or interest rate reductions. You won't always be successful, but it's always worth a try.
The Bottom Line
The credit card regulation changes which began in 2010 do offer consumer protections previously unavailable. However, you still have to be wary of both how you use your cards and what's contained in credit card company correspondence.