Whether you received a message from the credit card issuer that your credit card interest rates have increased or you noticed the change on your own, it’s worth figuring out the reason for the increased APR. The APR (Annual Percentage Rate) impacts the interest charges payable on a credit card if the holder carries a balance. Increased interest rates can make the repayment costlier for the cardholder over time. Therefore, understanding the reason for the interest rate increase helps determine what one can do to bring it back down.
Although credit card companies must follow strict standards to protect consumer rights, they may raise the APR for specific reasons. Here are five reasons your credit card might be going up.
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1. The End of Promotional Rate
Many individuals take advantage of a 0% APR scheme during the first few months of getting a card. It is a lucrative strategy most people use to transfer their existing debt or fund a big purchase. However, the 0% promotional period lasts for only a few months, after which the card company will raise the rate. Although the new interest rate depends on multiple factors, the cardholder’s credit score and repayment history are big among those.
According to the RBI (Credit Card and Debit Card – Issuance and Conduct) Directions, 2022, card companies must notify the cardholders at least 45 days before making any major change in their account terms. However, the end of the promotion does not require any such notice. Therefore, the cardholder must keep track of the 0% APR period and pay off the balance before the issuer charges interest.
2. Payments are Late by More Than 60 Days
Delaying the credit card bill payment is never a smart move. These days, most credit card companies accept online credit card payments, making bill payments convenient for users. Delaying the payment usually triggers late charges, and a delay period of over 30 days can damage the cardholder’s credit rating. Things get even worse when the payments are late for more than 60 days. In such a situation, the issuer can impose APR penalties as high as 30%.
In most cases, the RBI guidelines prevent card companies from increasing the interest rate on existing balances. That means if the company increases the interest rates, the new rates apply only to new charges. However, if the cardholder gets hits with APR penalties, it may apply to outstanding balances too. Consequently, the individual gets stuck in an unreasonably high-interest rate until they pay at least six payments on time. So, users must try their best to pay at least the minimum monthly bill amount on time.
3. Substantial Decline in the Credit Score
Credit card companies regularly monitor each cardholder’s personal and account information. If they spot a change they don’t like, such as a substantial decline in the credit score, they are free to raise the current credit card interest rates. However, they must send a 45 days notice to the cardholder before changing the rate. Moreover, the rate will apply to new purchases only and not to the existing card balance. Those who do not accept the change have the right to pay the outstanding balance and close the account without penalties.
If the card company increases the rate due to declined credit score, they must review the account in a few months to look for signs of improvement. If the score is back up, the cardholder may request the issuer to reduce the interest rate.
4. Variable APR and Increasing Repo Rate
Most credit card companies offer variable APRs that are directly linked to the repo rate. This is the general rate at which the RBI lends to other banks, credit card companies, and other financial institutions. As the central bank increases its repo rate, other credit providers also increase their interest rates to balance the finance. In such a situation, the credit card company does not need to send a 45-day notice to change the APR.
Since increasing repo rates affect everyone equally in the market, credit card users cannot do much about it. However, they can avoid paying interest altogether and not be affected by the change by paying their full monthly balance.
5. The Card is Over 12 Months Old
Card companies cannot raise interest rates if the card is less than twelve months old. However, there are exceptions, including a change in the repo rate or a 60-day delinquency. However, if the user holds the card for more than twelve months, the issuer can raise the interest rate. Again, they must send a 45-day advance notice informing them about the upcoming change.
Those who find themselves in this situation and are unsure why the company is increasing their interest rate can call the issuer immediately and find out why. It might be because an error popped up on the credit report. If that’s the case, they can take the necessary step to correct it and stop the interest rate from increasing.
If the credit card issuer increases the interest rate after a 45-day advanced notice period, it must review the account and re-evaluate the interest rate at least every few months. They might compare the user’s current interest rates with the applicable interest rates on new card applications. If the interest rates are higher than those for new customers, they must think about reducing them. However, that may be higher than the user’s original rate.
If they increase the rate due to factors like late online credit card payments or falling credit scores, they must review the situation regularly and decrease the interest rates if things seem to improve. For instance, if the user pays six consecutive payments on time, they must consider revising the interest rate and bringing it back down. Users may contact their credit card companies if they believe their increased interest rate was due to an error.
Those who pay their credit card balance in full monthly don’t need to worry about increasing credit card interest rates. Those with a promotional APR card must remember the expiration date and pay off the balance before the same. The credit card company may reduce the interest rate if the user’s credit score improves or if they reduce their outstanding balance. So, use your card responsibly to avoid rate increases and maintain the best terms.