DEFINITION of 'Retroactive Interest Rate Increase'

A common practice used in the credit card industry to increase interest rates on purchases made in the past. A retroactive interest rate increase will affect your outstanding balance. This is often viewed as an unfair lending practice because consumers likely purchased the item in the past based on the assumption they were receiving a fixed interest rate.

Because of this perceived unfairness, the Obama administration introduced the Credit Card Accountability, Responsibility and Disclosure Act in 2009, aimed at protecting against arbitrary interest rate increases, misleading terms, excessive fees and other unsavory credit card company practices.

BREAKING DOWN 'Retroactive Interest Rate Increase'

One of the key elements in the Act is the ban on arbitrary interest rate increases, including retroactive rate increases. This means that banks cannot raise rates on your existing outstanding balance unless you have failed to make payments for 60 days or more.

Of course, banks will still be allowed to increase rates if it was agreed to in your contract. For example, an introductory rate can be increased after an agreed-upon amount of time, but that amount of time has to be a minimum of six months, under the new law.

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