Several years ago, there were very few rules about interest rates on credit cards. For example, issuers could raise your rate without notice. The Credit CARD Act of 2009 addressed a lot of the interest rate issues and gave consumers more protection against sudden rate increases.
Credit card issuers can raise your rates, make no mistake about that. But they now have to follow strict guidelines before doing so. Let's take a look at the three rules that card issuers have to adhere to before hitting you with an increased rate.
Rule #1: No rate increases during the first year
Before the CARD Act, some card issuers were using "bait and switch" tactics. They'd lure consumers with a low interest rate and then after the consumer got the card, they'd increase the rate. Under the CARD Act, card issuers can't raise your interest rate during the first year. Any zero percent introductory offers have to be in place for at least six months.
Exceptions: Rate increases can occur during the first year if a required minimum payment is more than 60 days late, if the rate is tied to a variable index, such as the prime rate, and it rises, or if a promotional (or introductory) rate ends. Also, if you're in a debt settlement agreement with the credit card company and you don't make the required payments, your rate can be raised.
Rule #2: No interest rate increases on existing balances (with a big exception)
This rule is a very big deal. Credit card companies had been able to raise rates suddenly and also apply them to your outstanding balance. Think about that for a minute. You have a $2,000 balance at 12 percent, and suddenly, your issuer raises your rate to 19 percent and applies it to your current $2,000 balance.
The CARD Act only allows the issuer to apply the new rate to new purchases (with a few exceptions). So in the previous example, the $2,000 balance continues to accrue interest at 12 percent and any new purchases are subject to 19 percent interest.
Exception: Unfortunately, there is a giant loophole regarding this rule and it can cost you a lot of money. If you're more than 60 days late with a payment, here's how it works. Let's say you get a notice that your rate is going up because you were over 60 days late. Okay, the "outstanding balance" is defined as the balance you have 14 days after the notification's postmark date. So that's the amount that will be subject to the new rate.
There is some good news, though. After six months of on-time payments, the issuer is required to review your account and possibly reinstate your lower rate.
Other exceptions: Rate increases to the existing outstanding balance can occur if the rate is tied to a variable index, such as the prime rate, and it rises, if a promotional (or introductory) rate ends, or if you're in a debt settlement agreement with the credit card company and you don't make the required payments.
Rule #3: Interest rate increases require a 45-day notification
After the first year, the card issuer can raise your interest rate and make changes to the terms as long as they give you a 45-day notice. For instance, if they increase your minimum payment, that's a significant change to the terms and a 45-day notice is required.
Now, in some cases, this notice also serves as an opportunity for you to "opt out" if you don't want to agree to the new terms. If you opt out, this means that the card account will be closed and you can't use the card for new purchases.
Issuers are not required to offer you the chance to opt out in the following circumstances: an increase in the minimum payment, the APR is increased on new transactions only, and if the rate increase was due to a payment that was over 60 days late