Key takeaways
- Your credit card APR can go up if the prime rate changes, you paid your credit card bill late, your intro APR offer ended or your credit score dropped.
- If your APR increases, you can work on paying down your balance or transfer your balance to a card with a low or 0 percent intro APR offer.
- If your credit card debt is really high, you may want to consider debt consolidation efforts or credit counseling.
Being a credit card holder, you rely on the terms of your card to remain consistent. However, there are instances where this stability is disrupted. Your credit card issuer may decide to increase your annual percentage rate (APR) for various reasons. This change in APR, one of the most critical terms of your credit card, can have a significant impact on your account when it occurs.
Your APR plays a crucial role in determining your monthly payments and the speed at which you can reduce your credit card debt. If your credit card APR has been raised, you may be uncertain about your options. Here’s what you can do if your issuer has increased your credit card APR:
Why did my credit card APR increase?
The prime rate changed
Many credit card APRs are linked to the prime rate, which is the rate used by many lenders for various financial products like credit cards, mortgages, and auto loans. Changes in the Federal Reserve’s federal funds rate, which is the interest rate banks charge each other for overnight lending, can impact variable-rate credit products. Consequently, your credit card APR may be affected.
When the federal funds rate rises, it results in a rate hike. Since the spring of 2023, the Federal Reserve has announced several rate hikes, with the most recent increase of a quarter of a percentage point occurring on July 26, 2023. The Fed maintained its target range at 5.25 to 5.50 percent on July 31, 2024, for the eighth consecutive time.
Even if the prime rate is not currently increasing, it may not be decreasing either. Until there is a downward trend in rates, your card issuer may not adjust your APR, especially not to lower it.
You paid your credit card bill late
Failing to pay your credit card bill on time may lead to your card issuer imposing a penalty APR, which could be as high as 29.99 percent. Normally, your credit card starts with a regular variable APR unless you have an introductory APR offer. Missing a payment could result in your regular or introductory APR being replaced by this penalty APR.
However, the penalty APR is not necessarily permanent. If you resume making timely payments, your card issuer should review your account and reinstate your regular APR.
Your introductory APR offer has expired
If you received an introductory APR offer when you became a cardholder, such as a 0 percent introductory APR offer, that offer may have ended. This promotional offer provides cardholders with a lower interest rate for a specified period. Once this promotional rate expires, your regular APR takes effect and is applied to any balance you carry on the card.
Your credit score declined
A decrease in your credit score could lead your lender to view you as a higher credit risk, resulting in a higher APR for the borrowed money. Once your card issuer detects a drop in your score, they have the right to impose a new, higher APR. You do have the option to opt out of the higher rate when notified of the impending change, but the issuer may decide to close your account as a consequence.
What can I do if my APR keeps rising?
Now that you understand the potential reasons for your APR increasing, let’s discuss the actions you can take when this occurs. By planning and being diligent, you can effectively address APR increases by following these strategies:
Pay down your balance
The most effective way to mitigate the negative financial impact of a higher APR is to reduce or eliminate your credit card balance entirely. A lower balance means less money spent on interest charges.
You can reduce your balance in various ways. One approach is to stop making new charges on your card (while aggressively paying down the balance). You can also generate additional income through side gigs or selling items around your home for extra cash. Many people have successfully employed these methods to reduce their credit card balances. You can do the same with some creativity and determination.
Transfer your balance to a lower APR card
If you are unable to quickly pay down your balance, transferring it to a credit card with a lower APR could be a viable option. This move can save you hundreds or even thousands of dollars in interest.
Several credit cards offer introductory APR offers for balance transfers. Depending on the card, you may qualify for a 0 percent introductory APR offer on balance transfers (or a lower APR than the national average).
Keep in mind that balance transfers typically involve fees. Many cards charge 3 percent to 5 percent in balance transfer fees. To determine how much you could save with a balance transfer, even with these fees, you should use a balance transfer calculator.
Consolidate your debt
If your credit card debt is substantial, you might be eligible for low-interest loans that enable you to consolidate large amounts of credit card debt. Personal loan interest rates are usually much lower than credit card rates. However, lenders in this sector may have stricter lending criteria. You will need to demonstrate your creditworthiness, including good or excellent credit, a low debt-to-income ratio, and a stable employment history.
If a personal loan is not a viable option for you, you could explore borrowing against the equity in your home through a home equity line of credit or a cash-out refinance. These secured loans typically have lower interest rates than personal loans or credit cards.
While loans secured by your home’s equity may be easier to qualify for, it’s important to note that defaulting on such a loan could put your property at risk. While a secured loan can be an effective way to consolidate high-interest debt, it’s a decision that should not be taken lightly.
Consider credit counseling
If none of the aforementioned options are suitable for you due to excessive debt (which could worsen with an APR increase), credit counseling may be a viable solution.
Working with a certified credit counselor from a non-profit organization can help you create a budget and repayment plan to tackle high-interest debt as quickly as possible. In some cases, they may recommend a debt management plan (DMP), bankruptcy, or other alternatives.
If you choose this route, be diligent in selecting a credit counselor to work with. Verify their references and reviews, and ensure they have a track record of delivering promised services to clients.
Can I reject a higher interest rate?
If you are unwilling to accept the new interest rate offered by your issuer, you can either decline the rate increase or attempt to negotiate the terms. Declining the new interest rate offer typically results in your account being closed by the issuer since you are not willing to pay the increased rate.
If you reject the new rate, the issuer will inform you that you have 45 days from the notice date to close your account. However, the new interest rate will take effect 14 days from the notice date (meaning you can only make purchases at your old rate for up to 14 days after receiving the notice).
It’s important to note that the issuer may not be required to notify you of your right to close your account if they raise rates on new transactions (not existing balances) or if the interest rate change is due to being at least 60 days late with your minimum payment.
Keep in mind: If you cancel your card account, or if the issuer closes it because you don’t accept the new rate, the issuer can ask you to pay off your balance within a five-year period and raise your minimum monthly payment required.
How to negotiate with your issuer
If you opt to negotiate with your issuer, you may have the opportunity to have your rate lowered again in certain situations. For instance, if your issuer raised your interest rate as a penalty for a late minimum payment, you can request to return to the lower rate once you have made timely payments for six consecutive months after the rate increase. You can also explain your financial circumstances to the issuer, and they may agree to maintain a lower rate for a specified period, especially if you are a long-standing customer.
It never hurts to inquire, so reach out to your issuer and try to speak with someone in their retention department before deciding to close your card.
The bottom line
Changes to the terms of your credit cards can be perplexing, especially if they are not in your favor. Even a slight adjustment in your card’s APR can result in more money leaving your wallet.
While the ideal practice is to avoid carrying a balance on your credit card, dealing with an APR increase when you already have a balance is a reality. The good news is that you have several options in this scenario to navigate through it successfully, even if paying off your debt immediately is not feasible at the moment. You can transfer your balance to a card with a lower APR, consolidate your debt with a low-interest loan, or seek assistance from a licensed credit counselor.
Before taking any action, consider reaching out to your issuer to explore potential solutions. They may offer a pathway to reducing your APR once again.