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If you’re one of the millions of Americans who have received a letter warning of interest rate hikes on your credit cards, you may well have been tempted to reach for the scissors and cut up your plastic. But before you do, take a deep breath, and consider your options. While shredding your credit card may be emotionally satisfying, if you play your cards right, so to speak, you may be able to take the worst sting out of rate increases.
Despite recent efforts by Congress to accelerate the effective date of new curbs on credit card interest rate hikes, rates are likely continue to inch upwards. Credit card companies are raising rates in the face of a troubled economy and higher credit card defaults, which in some cases have almost doubled over the past eighteen months. And, while the new credit card law limits card issuers’ ability to jack up interest rates on existing balances, it won’t put an end to interest rate increases on future charges. Card issuers can’t raise rates the first year you have a new card, but after that, they just have to give you 45 days notice of rate increases.
So if your interest rate gets increased to exorbitant levels, what is your best course of action? Of course, if you never, ever carry a balance, the interest rate on the card doesn’t matter, as you’ll be paying off last month’s charges before the interest-free grace period expires. However, if you’re among the one out of every two Americans who regularly carry a balance, here are four steps to take to take the sting out of even the steepest rate increases.
1. Have back-up credit cards in place. Having more than one credit card these days isn’t just a convenience, it is a must, if you want to keep your options open. Not only could your interest rate go up, credit card companies have also been cutting back on credit limits. It’s important to have a credit cushion in place, should that nice $10,000 credit limit shrink to a measly $2,000.
If you already have several credit cards with available credit, you may already have all the back-up you need. If you don’t, apply for one or two new credit cards, so you will have a credit cushion available should the terms on one or more cards change in ways you don’t like.
2. Shop for low interest credit cards. Yes, Virginia, there still are low interest credit cards out there charging less than 15 percent interest. Some are issued by credit unions and some by banks with a business model based on low interest card offers; these are less likely to hike interest rates going forward.
It’s generally advisable to only apply for a new credit card once every six to twelve months, because your credit score takes a hit each time your credit report is pulled. However, if you’re not planning to apply for a mortgage or other type of loan within the next year, this is not so much of a concern, as your credit score will have time to bounce back. If you need to apply for more than one new credit card, you’re better off doing it in one sitting, so your credit score won’t have time to go down before you apply for the next card.
3. Call your credit card company. Once you have other options in place, call your credit card company. Ask them why they increased the interest rate on your credit card. Emphasize your good payment history, and tell them that you are considering cancelling the card and transferring your balance to another card. If you have other accounts or investments with the card issuer, let them know that your other business is at risk as well. If you are a good customer, the card issuer will likely be willing to work with you and lower the interest rate, rather than lose you as a customer. If you have a history of late payments, they may be less responsive. If the first customer service representative isn’t helpful, ask to speak with a customer retention specialist.
4. Phase out your high-interest credit card. If your credit card company does not offer to lower the interest back down to a level you’re comfortable with, you have two options. Under the new credit card law, you have the right to “opt out” of a higher interest rate or a new annual fee. The account will be closed, but you will be able to pay off the balance at the current interest rate. Cancelling credit cards can hurt your credit score, however, so this may not be your best option.
Alternatively, you can phase out the high-interest card by transferring the balance to a lower interest card. Don’t be tempted by 0% APR balance transfer offers that revert to a high-interest rate after a few months; these generally are not worth the steep 4-5% transfer fee. Unless you can find a balance transfer offer with a long-term low rate, you’re better off phasing out your high-interest balance in the following way: Charge everything you would normally pay for with cash or a check to the new, lower interest credit card(s); use the cash you save to pay down the balance on your old, high-interest credit card. (Just be sure to put the money aside to pay off that credit card balance each time you charge something to the new credit card, so you don’t inadvertently rake up new credit card debt.)
These simple measures will go a long way to take the worst sting out of rate hikes. It will take a little planning and research, but if it means avoiding paying interest to the tune of $20+ percent, the savings will be well worth it.
