WHY ARE CREDIT CARD COMPANIES RAISING YOUR RATE?
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A growing number of our newsletter readers' e-mails to are asking the same question lately: Should I opt out of this rate hike? Credit cardholders given the chance to avoid an imminent rate increase face a number of options, each with pros and cons.
No federal law or regulation requires issuers to offer cardholders a chance to reject a rate re-pricing, or opt out, according to Chi Chi Wu, a staff attorney for the National Consumer Law Center in Boston. BUT Issuers may still present an opt-out in the name of goodwill or to comply with state law. THEY usually will, but not always, opting out involves closing the account. The cardholder can't use the card going forward but gets to pay it off at the old rate and under the existing terms. WE HIGHLY SUGGEST CLOSING THE ACCOUNT TO SEND THE CREDIT CARD COMPANIES A MESSAGE!
Your best course of action depends on your situation. Here are some scenarios.
Paying off the debt
If you can wipe out the outstanding debt before the rate increase applies, this is the best move for your wallet and credit score. You will pay no additional interest charges and your score won't suffer from an account closure. To keep the card active after the higher rate takes effect, use the card once a quarter to purchase something inexpensive and pay the balance off.
Balance transfers
If the amount is too large to pay off and the rate increase is worthy of avoidance, see if you can do a balance transfer to another card. This leaves the original account open and paid off, which will help your credit score as you attack the balance on the new card. Scott Bilker, creator of DebtSmart.com, says he'd first look to his existing cards for balance transfer deals, then consider new cards if his didn't offer any good rates.
It may prove tough for some to qualify for a better interest rate. For rates below 8 percent, you need a stellar credit score. "I'd say north of 720," says Curtis Arnold, founder of CardRatings.com and author of "How You can Profit from Credit Cards."
There's also usually a cost involved with balance transfers. Balance transfer fees are typically 3 percent of the balance, but increasingly issuers are charging 5 percent of the balance with no cap on the fee, says Greg McBride, senior financial analyst at Bankrate.com.
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Use the work sheet below to plug in the costs. Note both the teaser balance transfer rate and the regular APR following its expiration.
If the math plays out in favor of a balance transfer, make sure not to charge new purchases until that balance transfer debt is paid off. Issuers will usually apply payments to lower-rate balances first to maximize profit.
First, gather some information on your old card. Dig out your most recent bill and a copy of the current agreement with the old credit card, plus the agreement with the new card company.
Old card Info
Toll-free customer service number (8___)_____-_______
Account # __________________
Balance $__________
APR ____ %
Grace period ____ days
Due Date ___/___/______
New card Info
Toll-free customer service number (8___)_____-_______
Account # __________________
Balance $__________
Introductory APR ___ %
Date intro rate expires ___/___/______
Date balance transfer APR expires ___/___/______
Fees for balance transfer $__________
Annual fee $__________
Grace period ____ days
Due Date ___/___/______
Print out the form now.
Now that you have the necessary information, you're ready to make the transfer.
Follow these steps in order, checking them off one at a time.
Credit card account close-out procedure
Send minimum payment to old company by due date.
Sign up for new card.
Complete balance transfer form.
While balance is pending, continue to make minimum payments by due date to old card.
Receive notice of balance transfer to new company.
Call old company to verify balance transfer.
Receive billing statement with zero balance from old card company.
Close old account by calling or writing the issuer. Ask the issuer to note in any statement to a credit bureau that the account was closed at the customer's request.
