The Truth in Lending Act is the federal law that says (among other things) when banks are allowed to increase credit card interest rates. The Credit CARD Act of 2009 restricts the times when your interest rates can increase.
Four Times Banks Can Increase Credit Card Interest Rates
- After you've become more than 60 days past due on your payment. That means the credit card issuer can apply the penalty rate after you've missed two consecutive credit card payments. The credit card can only apply the penalty rate if you're late on that credit card or another credit card owned by the same company. The practice known of "universal default"—increasing your rate if you were late on a payment to another credit card issuer—has been banned.
- When the underlying index rate for a variable rate increases. For example, if the prime rate or LIBOR increases, your credit card rate may increase, too. Pay attention to news about rising prime rate and LIBOR rates to get advance warning of an increased credit card rate.
- When a promotional rate expires, your credit card interest rate will likely increase. By law, promotional rates must last at least six months. After the promotional rate expires, the regular interest rate will go into effect. Make sure you understand what your regular rate will be when you're signing up for a credit card with an introductory rate.
- After you've completed a debt management plan or other hardship arrangement or if you’ve defaulted on an existing arrangement.
The chart below illustrates the discrepancy between the prime rate and credit card interest rates, from 2000 through today.
Will Banks Lower an Increased Interest Rate?
Creditors are required to review previous credit card interest rate increases every six months to see if circumstances have changed and lower your interest rate accordingly. If your rate was increased because of a 60 or more day delinquency, your creditor is required to lower your rate after you've made six consecutive payments. However, your card issuer only has to lower the rate on the existing balance.
Credit card issuers are allowed to leave the higher rate in effect for new purchases made after the penalty rate became effective. Check your credit card terms to see if your card issuer uses this practice.
Creditors cannot increase interest rates within the first year of an account's opening unless you’ve defaulted on the account, you have a variable interest rate, your hardship arrangement has ended, or the promotional rate has ended.
Advanced Notice of Fixed Interest Rate Increases
Not many credit cards have fixed APRs these days. But, for those that do, credit card issuers are required to give you a 45-day advance notice before increasing your interest rate. At that point, you can choose to opt-out of the new rate, in writing, and pay off your balance at your current interest rate. Your credit card issuer may close your account if you decide to opt-out of the interest rate increase. If you choose to accept the new rate, the higher rate will only apply to charges you've made after the rate increase became effective.