Your Interest Rates Are About to Go Up

By Andrea Karim. Last updated 11 December 2008. 21 comments

The thing about financial crises is that they never fail to affect everyone. Just because your entire investment portfolio didn't implode when the dotcom bubble burst doesn't mean that you weren't laid off like thousands of other people. Didn't get sucked into a subprime mortgage? Lucky you. You still need to watch your back, because your fiscal responsibility doesn't mean that you're safe from the crisis fallout.

Our economy is in the midst of a serious slide (bordering on a full-fledged recession). The causes for it are numerous, but the subprime mortgage crisis is causing some of the most accute problems.

One of these problems is that your credit card company might decide to raise your interest rates. How is this different from the way credit card companies usually behave? The problem is that now, credit card companies are going to start raising interest rates for customers with an excellent credit history.

Why? Because banks are hurting financially. Their problems are two-fold and causal:

  • Banks are losing millions on defaulted subprime mortgages.
  • Americans have been running up huge credit card bills in the past few years, with the assumption that a home equity loan could be secured to pay off the personal debt. Now that home equity loans are difficult to get, credit card delinquencies are on the rise.

This means that banks need to make some money, stat. How do they plan on doing this? They're going to raise interest rates on new and existing lines of credit and charge you even more in junk fees.

It doesn't matter to banks that you're a good customer with a good credit standing. What matters to banks is their bottom line, and the only way they can think of to prevent more massive financial losses this year is to rip off their remaining customers. The result is that banks are looking for reasons to consider you an "at-risk" customer.

ARTICLE CONTINUES BELOW
What type of credit card are you interested in?
How much do you spend per month?
Do you carry a balance?

mer.

Traditionally, at-risk customers are usually customers who run up a huge debt, pay late, only make minimum payments (although this is a tough one, as banks also LOVE you for only making minimum payments), or who have delinquent accounts. But now that banks and credit card companies are faltering, they're willing to look for all kinds of other at-risk factors, such as:

  • Paying for necessities, like food, gas, or your mortgage, using credit.
  • Buying items that aren't considered high-quality, like retread tires (that's right - according to Robert Manning, your credit card company is monitoring your purchases and will raise your rates if they think your purchases indicate that you are entering a time of financial difficulty).
  • Paying your bill too close to the deadline.

This is bad news for people who buy everything on credit in order to earn air miles or other bonus rewards. It's also drastically unfair and an incredible invasion of privacy. It's also another example of how we all end up paying for the collective financial stupidity of a few rogue investment bankers and mortgage lenders (yeah, I'm looking at you, Countrywide).

Although you are always supposed to keep an eye on your credit rates, be especially vigilant in the comings months - check every statement for bogus fees and unnecessary rate hikes. You may consider not purchasing items like groceries with a credit card for the considerable future. Be sure to call and harangue your credit card company if they try to peg you as at-risk despite a clean payment record. Try to pay your credit card bill at least three days in advance of the due date, if not significantly sooner.

Tedious though it may be, close monitoring of your statements can save you hundreds of dollars in the long run.

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Guest's picture
gtWise

I still don't get this whole crisis.

1) People who already have substantial debt accumulated on their credit cards can always just tell the credit card company that "Nope, I'm not going to agree to the new rules, please close my account and I will pay back everything I owe under the original terms and interest rate. These people should be closing their accounts anyway as clearly they have already spent more than they should have and have to spend less than what they earn to get out of it to start with. If they still need the credit cards then it's clearly a whole different issue and no matter what the interest rates are they are screwed.

2) I feel no remorse for people who have ran up credit card bills in hopes of taking out a home equity loan to cover it. That is just plain dumb and should be punished as such.

3) You also write about people who use their credit cards to get miles or rewards. These people better not have any balance on their cards. If they do they most definitely lose more on the interest than what they make back on the rewards. And if they do carry a balance they should stop spending money on this card and they immediately grouped with the people under section 1, hence no problem.

I have read at least a dozen different spins and articles on this credit card interest rate crisis. I don't see it as a problem, it's only a problem for people who carry heavy loads of debt and can't live without getting into more debt. And for these people the interest hike is the least of their worry.

Not to mention that every single one of them signed a binding contract with the credit card companies in the first place...

Guest's picture
Jared

I agree that no one should be helping out people who borrowed, borrowed, and borrowed some more. However, credit card companies are very predatory with their random interest rate jumps to 23%, and that's how people get in trouble.

I wrote an article about personal finances and the dangers of credit cards called Get Personal Finances in Order.

People must be educated, but it's not all their faults, financial institutions are guilty of the recent credit abuse also.

Andrea Karim's picture

Ah, the ol' "they pretty much deserve what they get" argument. My personal favorite. I suppose anyone who has a revolving balance must DESERVE to have their rates raised, even if they pay regularly? And it's no big deal to have your rates raised because you made a decision to purchase a cheaper item?

I didn't say that there was an interest rate crisis; I said that there's a revenue crisis in the banking industry. This is caused by the subprime fallout, and is creating incentives for banks and lending institutions to bilk customers for more money, even if the customers are playing by the rules and trying to build good credit.

Interest rates do make a difference, so I don't think it can be considered the least of anyone's concerns. Let's say someone has $5,000 of credit card debt, and are making payments of $200 a month at 12% interest. At that rate, they can pay down the debt in 29 months. If that interest rate goes up tp 25%, it will take 40 months to pay it off. That's an additional 11 months - $2200!

And it's not like every line of credit is opened by some greedy bastard who just wants some play money. You have to establish credit in order to qualify for a mortgage or a business loan. And speaking of business loans, it's becoming so difficult to secure these loans now - so small businesses are turning to lines of credit in order to get started.

Two other things to consider: a revolving balance is not always a bad thing, credit rating-wise. And closing an account does ding your credit a bit.

Guest's picture

first, welcome back Andrea!

second, out of curiosity, where did you hear about this? It's pretty scary to think that they might consider me an at-risk customer because of particular purchases.

Andrea Karim's picture

Thanks, Barbara; good to be back. :)

One of the links within the article will take you to an NPR site with the report and an interview with Robert Manning; I heard about it on the radio last night and researched it a little more today. I've also heard, probably also on NPR (can you tell I'm an NPR junkie? I don't have a TV) that banks are coming up with new and clever ways to charge you for normal banking transactions - so keep an eye on your bank statements, too.

Guest's picture
marisa

Just wanted to emphasize that, especially right now, you should double-check ALL interest rates, not just credit cards. The Home Equity Line on our house has an adjustable rate; I noticed the last time that prime changed, our rate went UP, not down as it should have.

It took forever to get it straightened out (my bank claims not to know what happened, distressingly), but it was definitely worth doing. Now I watch that statement like a hawk.

Guest's picture
Nemo

Some valid points here. There is another way to shield yourself from junk fees and random rate hikes: get to know your local bank manager and become a customer they want to keep.

Many of the problems described are particular to national or other large banks. Many regional or smaller banks haven't gotten involved up in subprime and credit card lending, and they're less likely to ratchet up the rates & fees. National banks may offer more services (or not), but exposure to macro trends is a consequence of dealing with the biggest banks.

Get to know your branch manager and build the relationship with savings, checking and loans. The bank where I work actually sets a value on each relationship based on account types, balances, and transaction types. Good, profitable customers get good treatment. (Profitable customers are not necessarily deadbeats and slow payers who rack up fees)

Guest's picture
Katy

Andrea, thanks for the heads up. I have been putting groceries on my credit card. My unemployment ran out mid April and I am hunting furiously for a job, even a temp job. Agencies won't let me walk in; they ask to see my resume and /or email me msoffice tests; then they don't call back! (whine......)But I continue to take actions, be positive as possible (at least in the outside world)

I just paid my balance. In full. Lots of grocery and pharmacy payments. So thanks again!

Guest's picture
gtWise

Interest rates do make a difference, so I don't think it can be considered the least of anyone's concerns.

I am not disagreeing with this statement. I just tried to show that the interest rate hike is easily avoidable. You simply don't agree to the new terms and pay off your balance under the old ones. Easy as that.

The rest of my post was trying to debunk the arguments that you used against my solution. Now you came up with several more:

the customers are playing by the rules and trying to build good credit.

Let's just nip this one in the bud. You don't build good credit by carrying a balance. And if you don't carry a balance the interest rate hike has no effect on you. You can build perfectly good credit by paying off your credit card every month.

And it's not like every line of credit is opened by some greedy bastard who just wants some play money

Then what are they opened for? To buy groceries? To pay rent? These people seriously need to reconsider their finances and they have to realize that they might need a second job, move to a cheaper city or simply cut back. Remember, no one is entitled to free or cheap credit.

The rest of your arguments simply reiterate what the others said, so I'm going to spare you with my rebuttal on those.

Guest's picture
Guest

Paying off with old terms is usually not an option. When these notices are sent they include the provision that not accepting means the total balance is due within 30 days. Chances are someone in this situation can't do that and opening a new account to transfer to it is impossible. A person in this bind has no choice but to accept or default.

We all agree that carrying a balance is not a smart thing. But, there are many legitimate reasons why a person would be in this position, so your gtWise assumptions are not warranted.

Guest's picture
Guest

Who said anything about free credit? The issue is banks jacking up interest rates (sure, they're allowed to do that because they hold us by the short hairs when it comes to these things) to cover their own idiotic mistakes in making risky investments.

You have a comment here from someone who is using their credit card for groceries and experiencing the problems that come from being unemployed. The issue here is not that that person is fiscally irresponsible, but that that person may have to pay higher interest rates if they have a revolving balance because banks tried to make an easy buck of off subprime investments. There are times when people may need to rely on credit to get by - being judgmental of them and their finances doesn't excuse what banks are up to.

Guest's picture
Guest

Actually, you can opt out of those new terms assuming it's not because you paid late or something like that - you can carry the balance at the old rate but just won't be able to make any new charges to the account. Just write the letter asking the credit card company to close it. I've had a couple banks try that on me when I had really low fixed interest rates that I was revolving balances at. So the account is closed technically, but I'm paying off the balance over time still at the ridiculously low rate.

Guest's picture
Guest

we take a vacation every year on credit cards.

when we get back we seal the cards in an enverlope and write a message on them...DO NOT OPEN UNTIL AUGUST

WE BOTH KEEP OUR WORD AND NO MATTER WHAT EVEN IF WE NEED THEM WE MAKE DUE. A SECOND JOB FOR A LITTLE WHILE DOESN'T HURT ANYONE.

Guest's picture
janet

If you think about it, the banks who impose higher interest on what you purchase on your credit card (gas, food, etc) are only hurting themselves in the long run. They'll losing potential business if they start to tell you what you can and cannot purchase with a credit card. Seems like they're going down a slippery slope. They'll start finding other items to penalize you on. Eventually, you won't be able to buy anything. The convenience aspect of using the credit card will be destroyed. That's gonna cost them lots of transactions and interest.

Let them shoot themselves in the foot. American consumers will wise up and stop using credit so unwisely. I think it's okay to have credit cards.... to charge from time to time as long as you can pay it off.

Like anything, credit should be used in a responsible way. That being said, I don't down people who fall on hard times and then have difficulty paying off their credit cards. You do the best you can in tough times, and it's just wrong for the credit card companies to take advantage of someone who's down on their luck when the original credit card agreement stated that you would be billed a certain amount of interest monthly. I know that banks are supposedly free to change your interest rate at any time, but maybe they shouldn't put your interest rate in big bold print when you sign the card and then change on you in mid stream.

Guest's picture
JimmyDaGeek

I am reading all this in amazement. Why is the "buy now, pay later" culture so matter-of-fact that we cringe every time we hear that banks are going to increase their rates and fees. What ever happened to responsible temporary uses of debt? Is it normal to live with a permanent credit card balance? Financial catastrophes happen and we may need to borrow money. But that should be the exception, not the lifestyle.

I don't carry a balance on my credit cards and I run everything through them to get my rewards. That includes groceries, gas, doctor visits, etc. I have no idea what my rates nor do I care. I am one of deadbeat freeloaders that credit companies hate. As long as they give me a free grace period and rewards, I will use my credit cards.

Guest's picture
kitty

Who cares really? The only responsible use of credit card is to pay your balances in full by the end of the grace period. Anybody with an ounce of common sense shall understand it. The only exception would be a real emergency, and by emergency I mean unexpected and unpaid medical or legal bills, not just usual "life" stuff.

I couldn't care less if they raise my rate to 99.9%. I am not paying it. In fact, if someone gives me a card that charges 99.9% but gives 50% cashback, I'll take it.

To someone who mentioned getting credit history - nobody tells you you have to carry a balance to get credit history. Using a card then paying your balance IN FULL before the interest occurs will result in even better credit history.

As to those with medical bills, if they had been responsible and have good credit, and their card raises interest rate, there is nothing to prevent them from transferring their balance elsewhere. There is still no shortage of "0% for one year" offers. Even with 3% transfer fee, it is still only 3% for the whole year of no interest. A friend of mine was in this situation because of her mother's cancer (the mother was in Russia, there was a drug that allowed her to live a bit longer and have good quality of life but it was expensive). My friend was shuffling her balance from one 0% card to another until she comfortably repaid her debt.

@Jared - people are in trouble the first time they bought something they cannot afford to repay in full. By the time the rate jumps to 21%, they are already in trouble. As to "learning about personal finances" - I grew up in the Soviet Union. I can assure you, there was no "personal finance" education there, not even such a concept. Yet, my lack of knowledge didn't prevent me or even my 40-something parents who couldn't even speak English properly to figure out that if you don't pay your full credit card balance by the due date, you pay high interest. OK, 21% is more than 10%, but even 10% is wasted money at current bank savings rates. It isn't rocket science of "finance", it is plain common sense. If you earn taxable 4% on your savings, paying more than 4%-taxes in interest to somebody else is wasted money. It was totally obvious to my parents, yet Americans who have no problems with English complain about "fine print". The information about the grace period and interest is not in fine print - it is usually nicely summarized in a table.

Julie Rains's picture

Apparently some members of U.S. Congress agree with Andrea, as reported by the Wall Street Journal: that is, some credit card practices are predatory and unfair. The Federal Reserve Board is accepting comments on credit card regulations -- go here to view comments or submit your own comments.

I think it is odd that a company can create an agreement that says that it can change all the rules at a moment's notice, without fully substantiating why it is changing the agreement (e.g., Fed rate has changed).

Guest's picture
Suz

So I finally got rid of all my credit cards, paid off the balances, and now have horrid credit. Because apparently I don't have ANY credit... but frankly I'm happier without them, I don't have to worry about spending on them, using them incorrectly, whatever.

I think that the real route to financial success is figuring out what works for YOU even if it's not the same thing that works for everyone else.

-Suz

Guest's picture
Guest

Hm. When I opened my first line of credit, I was told that it was good to have a small revolving balance every now and then. I never did it, because I hate paying interest, but was under the impression that it certainly never hurt anyone's credit rating.

Andrea Karim's picture

Thanks for raising that point, Julie. I'm not sure how many other business models work with flexible contracts like loans - whenever my cable bill goes up, I call to cancel, and they try desperately to keep me as a customer by dropping my monthly payment.

Look, I understand the whole "greedy American assholes and their credit cards" line of thinking, but the point isn't just that we should pay down our cards blah blah blah (I've talked endlessly about this before), but that people who, for whatever reason, need or choose to carry a revolving balance for a while shouldn't have their purchases tracked and penalized by their lenders. Especially because it's the lenders' fault that they (the banking institutions) are in such dire straights right now.

I, too, was told to keep a small revolving balance on my credit card when I first got one in high school. I charged something like $100 and paid it of in $20 increments, and I had stellar credit - who knows if the revolving part had anything to do with it? I've talked to a few other friends who have told me that they were given the same advice. However, it seems this isn't conventional thinking these days, and obviously no one should want to pay interest. I don't advise anyone carry a balance on their credit cards, but that doesn't mean that it's never going to happen or that interest rates should shoot up should someone need to exercise that line of credit.

Guest's picture
kitty

"I, too, was told to keep a small revolving balance on my credit card when I first got one in high school. I charged something like $100 and paid it of in $20 increments, and I had stellar credit - who knows if the revolving part had anything to do with it? "

This advice was totally wrong. There have never been any portion of a credit score that would reward those that carry balances. In fact, one of the parts of the credit score is utilization or the ratio of balance to available credit. The smaller the ratio the better. The ratio is smallest if your only balance at any moment are the current month's purchases.

BTW - I've never carried a balance and I've always had stellar credit.