Credit Default Rate: Why Your Credit Card Rate Just Went Up

A high credit default rate can spell disaster for a credit card company. Credit card companies extend credit to consumers based on each individual’s risk of defaulting on his debts. Credit card companies cannot accurately predict, however, when a job loss, divorce or financial emergency will result in an individual's failing to pay his credit card bill. Fortunately, credit card companies can no longer raise your interest rate due to a high default rate from other customers.

The CARD Act Regulates Interest Rate Hikes

Prior to February of 2010, credit card issuers reserved the right to increase account holders’ interest rates for just about any reason. If the company felt threatened due to a high number of defaulted accounts, it could raise the interest rates of customers with good payment histories to make up for the lost revenue. If you called the company to complain about an unexplained interest rate increase, the company would probably tell you that it raised rates due to “threatening economic conditions.”

The Credit Card Accountability, Responsibility and Disclosure (CARD) Act put a stop to some of the unethical practices credit card companies used to justify interest rate increases. This means you cannot again suffer a higher interest rate on your credit card account merely because other consumers failed to pay their bills.

Your Credit Card Company Can Still Increase Your Interest Rate

The CARD Act doesn’t protect you from interest rate increases altogether, though. If you make a payment to your credit card company more than 60 days late, the company may increase your interest rate. It may also increase your interest rate on future purchases if you make late payments to any of your other creditors.

If you happen to have a variable rate credit card, your interest rate will naturally fluctuate along with the index. Interest rate increases on variable rate accounts are normal and not covered under the CARD Act’s regulations.

Interest Rates Must Remain Steady for the First Year

When you apply for a new credit card and are approved, your credit card company is barred from raising your interest rate for one full year. There are a few specific exceptions to this rule, such as if you make a payment two months late on your account. Credit card providers that offer low introductory rates for new customers, however, may raise interest rates to the standard or default rate as soon as the introductory period expires.

After an Interest Rate Increase

If your credit card company increases your interest rate, it must reevaluate your account after six months. If you’ve kept a good payment history over that six-month period, your credit card provider must revoke its penalty interest rate.

Before a credit card company makes any significant changes to your account, it must notify you of the intended changes in writing a minimum of 45 days before the changes go into effect. If the proposed change is an interest rate increase, you have the option to “opt-out” of the new interest rate and pay off your balance under your current interest rate. Doing so, however, will result in your credit card company's cancellation of your account.

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