Protecting Yourself Against Further APR Increases
The Federal Reserve announced today that it will keep short-term interest rates near zero for an "extended period". This means the prime rate will remain at 3.25%, its lowest point in decades
But most consumers are now paying the highest interest rates in years on their credit cards.
According to the LowCards Complete Credit Card Index, which tracks the APR on the 1000+ credit cards in the United States (http://www.lowcards.com/CreditCardIndex.aspx ), the average advertised APR last week was 13.55%. On May 21, 2009, the day before the CARD Act was signed, that average was 11.64%. Nearly every issuer has taken interest rate hikes on their portfolio of cards, including some of the most popular cards on the market. At the end of 2008, the advertised rate for the Capital One Platinum Prestige was as low as 7.15%; today it is as low as 11.90%. Blue from American Express had an APR as low as 8.99%; today it is as low as 15.24%.
"The CARD Act was passed to protect consumers from punitive credit card practices, but the CARD Act is also one of the reasons that cardholders are paying higher interest rates. Issuers had to find ways to make up for the revenue they'd lose due to the Act's provisions and interest rate hikes have been one of them," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.
"If the prime rate starts to increase, just about every credit cardholder will see an increase in their APR because so many cards are variable rate cards that have an index tied to the prime rate. As the prime rate goes up, those increases can be passed on to cardholders. Since a number of analysts and experts are predicting that the Fed could start raising rates later this year, consumers should not be surprised to see an increase in their APR by year's end," says Hardekopf.
What should cardholders do today to protect themselves against these potentially higher interest rates?
1. Pay down your credit card debt
Before the CARD Act went into effect, issuers converted fixed rate cards to variable rates. When the Federal Reserve starts raising interest rates, the APR on all variable rate credit cards will also increase. Pay down as much of your balance as soon as possible.
"If you get a bonus, tax refund or birthday money from your parents, use that to pay down your balance. Instead of eating out, use that money to make an immediate online payment. Anything you can pay above the minimum payment is going to help you pay off your debt," says Hardekopf. "The only cardholders who won't be affected by rate increases are the ones who pay off their entire balance every month."
2. Ask for a lower rate
This is not as easy as it used to be because issuers are no longer competing to keep every customer. However, the dust is starting to settle for credit card lenders. If you have an excellent credit score and a good payment history, you may have some leverage to request a lower rate.
3. Transfer your balance to a lower rate card
If you have excellent credit and your APR is over 15%, you should consider transferring your balance to a card with a lower interest rate.
If it will take you more than a year to pay off your balance, look for a card with a low ongoing low interest rate because a low APR for the long-term is likely to be more important than the length of the introductory period. If you can pay off your balance in less than a year, apply for a card with a 0% APR for 12 months on balance transfers.
Look at the fine print. Some 0% introductory offers only apply to future purchases. Some have language that says the rate is good for "up to" a certain number of months. Confirm the balance transfer fee--most issuers charge a 3%-5% fee for the transfer and you must calculate whether it is worth incurring this fee to save on the interest payments.
4. Pay attention to your mail
Issuers can still increase your rate on future purchases, but they are required to provide a 45-day notice of the increase and explain your right to opt of the change.
"Notices are typically sent in plain, white envelopes that are easy to miss. But if you don't see your notice and miss your chance to opt out, then you are stuck with the higher rate," says Hardekopf.
But most consumers are now paying the highest interest rates in years on their credit cards.
According to the LowCards Complete Credit Card Index, which tracks the APR on the 1000+ credit cards in the United States (http://www.lowcards.com/CreditCardIndex.aspx ), the average advertised APR last week was 13.55%. On May 21, 2009, the day before the CARD Act was signed, that average was 11.64%. Nearly every issuer has taken interest rate hikes on their portfolio of cards, including some of the most popular cards on the market. At the end of 2008, the advertised rate for the Capital One Platinum Prestige was as low as 7.15%; today it is as low as 11.90%. Blue from American Express had an APR as low as 8.99%; today it is as low as 15.24%.
"The CARD Act was passed to protect consumers from punitive credit card practices, but the CARD Act is also one of the reasons that cardholders are paying higher interest rates. Issuers had to find ways to make up for the revenue they'd lose due to the Act's provisions and interest rate hikes have been one of them," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.
"If the prime rate starts to increase, just about every credit cardholder will see an increase in their APR because so many cards are variable rate cards that have an index tied to the prime rate. As the prime rate goes up, those increases can be passed on to cardholders. Since a number of analysts and experts are predicting that the Fed could start raising rates later this year, consumers should not be surprised to see an increase in their APR by year's end," says Hardekopf.
What should cardholders do today to protect themselves against these potentially higher interest rates?
1. Pay down your credit card debt
Before the CARD Act went into effect, issuers converted fixed rate cards to variable rates. When the Federal Reserve starts raising interest rates, the APR on all variable rate credit cards will also increase. Pay down as much of your balance as soon as possible.
"If you get a bonus, tax refund or birthday money from your parents, use that to pay down your balance. Instead of eating out, use that money to make an immediate online payment. Anything you can pay above the minimum payment is going to help you pay off your debt," says Hardekopf. "The only cardholders who won't be affected by rate increases are the ones who pay off their entire balance every month."
2. Ask for a lower rate
This is not as easy as it used to be because issuers are no longer competing to keep every customer. However, the dust is starting to settle for credit card lenders. If you have an excellent credit score and a good payment history, you may have some leverage to request a lower rate.
3. Transfer your balance to a lower rate card
If you have excellent credit and your APR is over 15%, you should consider transferring your balance to a card with a lower interest rate.
If it will take you more than a year to pay off your balance, look for a card with a low ongoing low interest rate because a low APR for the long-term is likely to be more important than the length of the introductory period. If you can pay off your balance in less than a year, apply for a card with a 0% APR for 12 months on balance transfers.
Look at the fine print. Some 0% introductory offers only apply to future purchases. Some have language that says the rate is good for "up to" a certain number of months. Confirm the balance transfer fee--most issuers charge a 3%-5% fee for the transfer and you must calculate whether it is worth incurring this fee to save on the interest payments.
4. Pay attention to your mail
Issuers can still increase your rate on future purchases, but they are required to provide a 45-day notice of the increase and explain your right to opt of the change.
"Notices are typically sent in plain, white envelopes that are easy to miss. But if you don't see your notice and miss your chance to opt out, then you are stuck with the higher rate," says Hardekopf.
