What Is a Retroactive Interest Rate Increase?

A retroactive interest rate increase is a common practice used in the credit card industry. The credit card company increases interest rates on purchases made on the credit card that occurred in the past.

A retroactive interest rate increase can affect your outstanding balance and is often viewed as an unfair lending practice. It is considered unfair since most consumers likely purchased the item in the past based on the assumption they were receiving a fixed interest rate.

A retroactive interest rate increase effectively backdates a higher interest rate, increasing the amount of interest owed and therefore the amount the purchaser will end up spending on the item.

Explaining a Retroactive Interest Rate Increase

A retroactive interest rate increase is perceived as an unfair lending process, which led to the Obama administration’s introduction of the Credit Card Accountability, Responsibility and Disclosure Act in 2009. The act aimed to protect consumers against arbitrary interest rate increases, misleading terms, excessive fees and other unsavory credit card company practices.

The act was also designed to limit the manner in which credit card companies can charge their customers. Its key elements include a ban on arbitrary interest rate increases, including retroactive rate increases. The act states that banks cannot raise rates on your existing outstanding balance unless you have failed to make payments for 60 days or more.

Banks still may increase rates if your contract allows them to do so. For example, an introductory rate can be increased after a specified amount of time, but that amount of time has to be a minimum of six months under the new law. Ultimately, this legislation hoped to ease the burden of credit card debt on consumers, and make it easier for consumers to pay off their balances. It was also enacted as a response to the rising level of unsecured consumer debt.

How to Avoid a Retroactive Interest Rate Increase on Your Credit Cards

Financial companies issue credit cards to enable cardholders to borrow funds to pay for goods and services on the condition that the cardholder will pay back the original amount plus agreed-upon additional charges. Credit cards are known to have higher interest rates than other forms of consumer loans and lines of credit. Interest on the amount charged to the card usually begins one month after a purchase is made.

Even though the Credit Card Accountability, Responsibility and Disclosure Act is now in place, it is important to read the fine print on what kind of interest changes are allowed in the contract before choosing a credit card. If you experience a retroactive interest rate increase or suspect one may have occurred on one or more of your credit card purchases, you should contact the U.S. Federal Trade Commission (FTC) or the Consumer Financial Protection Bureau (CPFB).