If you are one of the many credit card customers who have had your interest rate suddenly hiked up, then you are not alone. The credit card industry has been even more aggressive about squeezing more fees out of its customers lately since new legal restrictions will soon prohibit credit card issuers' from arbitrarily raising interest rates.
So, the question is what to do if you get a notice about your interest rate going up. You have a couple of choices and it really depends on your personal financial situation. Many "experts" claim that you should always keep your credit card account open since typically closing an account can reduce your credit score. See what makes up your credit score. Closing an account lowers your overall available credit. While the "experts" reasoning might be correct, everyone is not in the same financial position. Some of these "experts" likely even work for or lobby for the credit card industry, so don’t listen to every "expert" on the evening news.
Here are some basic financial scenarios to help you decide which situation you are in and how to best proceed once you receive a notice of an interest rate increase.
Scenario 1 - High Balance, questionable credit
Your credit card has a large balance on it - more than 50% of the available credit and your credit score is well below the national average of 680.
In this situation, unless you can pay off your credit card in full, you might be at the mercy of the credit card company. While you can close your credit card, retaining your existing (lower) interest rate, and continue to pay on the card - assuming the interest rate increase has not gone into effect yet, closing the credit card can have the effect of lowering your credit score since you will have less “available credit.” If you want to maintain your credit score, concentrate on paying off this account quicker so you pay less interest.
Scenario 2 - Low Balance, questionable credit
[AD]This situation is easier to deal with. Pay off the credit card as quickly as possible, keeping the account open. Once paid off, do not use the credit card anymore. Just leave the account open and unused. This will show that you have available, unused, credit on your credit report and can increase your credit score.
Scenario 3 - High Balance, good to excellent credit
If you have good to excellent credit, you might want to take the hit to your credit score by closing the credit card that is increasing your rate. As long as you close your credit card prior to the interest rate increase, you can continue paying on your card as normal while retaining your old interest rate. Some credit card companies add another monthly fee if you close the account while still paying on it, but that fee is normally far lower than the increased interest rate charged each month.
Scenario 4 - Low Balance, good to excellent credit
This is the best situation, as the consumer, to be in. With a low balance, pay the card off all at once or as quickly as possible and keep the account open. With the account open, but no balance on the card, your credit score will likely go even higher, improving your overall rating and allowing you lower interest rates if you will be in the market for a new car, a home, or a home equity loan.
Another option for you is to transfer the balance of the credit card with the increased rate to another card with a lower rate, however there is usually (always) a fee for transferring balances. This fee can cost quite a bit if the balance you are transferring is large, but if the increase in interest rates is very large, then this option might make sense.
Pay special attention to your statement each month. Sometimes a notification of an interest rate increase is in tiny print somewhere on your statement. Credit card companies are not exactly interested in you discovering that your rate will increase by several percentage points. They want you to keep using your card and paying the minimum due. Not everyone receives an advance notice of an interest rate increase. If your interest rate has already increased, you are out of luck. Simply try to pay off the account quicker to save long term interest rate fees.