The Color of Money

A tough call: Stick with your credit card after rate hike, or close the account?

By Michelle Singletary
Washington Post / October 7, 2009

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Ann has $10,000 in credit card debt. She was paying it off at an interest rate of 7.15 percent. “Then all of a sudden, when I received my September statement the APR had jumped to 14.99 percent,’’ Ann wrote to me. So she called the credit card company.

There was no mistake. Ann joined millions of other credit card users who have been notified that their interest rates are rising. They, like Ann, are being told to deal with it or get kicked to the credit card curb.

Ann has two choices. She can accept the higher interest rate, but she would only be able to make the minimum payment. Or she can reject the rate hike. But if Ann says “no deal,’’ the credit card company has told her it will close her account.

Under the new Credit Card Accountability, Responsibility and Disclosure Act of 2009 and Federal Reserve rules, a cardholder who is notified of a change in terms on or after Aug. 20 has the right to reject that change for the existing balance. If the consumer does so, the credit card issuer must either allow the cardholder to repay the balance on the existing terms, make minimum payments that include no more than twice the percentage of the balance included before the change in terms, or pay over at least five years.

Ann’s worried about her ability to get another credit card at a decent interest rate. She’s also concerned that canceling the card will lower her credit scores.

In advance of tougher regulations taking effect next year, many consumers have been receiving notices of lower available balances, interest rate increases, or a switch to variable rates.

What the companies are doing is wearing down a lot of good customers who, if left alone with decent rates, would have a better chance of paying off their debts.

The Federal Reserve Board’s rules implementing the CARD Act require that Ann be given the right to reject the 14.99 percent interest rate hike. However, as a general matter, the issuer is permitted to apply the 14.99 percent interest rate to new transactions.

Ann’s concerns are legitimate about getting another credit card with a rate as good as the one she had. She has less to be worried about concerning her credit score because she does not have any other credit cards.

What most affects a person’s score when an account is closed is the presence of outstanding balances on other open credit accounts. The scoring system looks at how much credit you are using compared with how much you have available.

Craig Watts, public affairs director for FICO, cleared up a common misconception. Closing a credit card account won’t affect the duration of someone’s credit history. That’s because credit reports include the history of closed accounts for a number of years, and FICO scores consider both open and closed accounts.

Ann, tell your credit issuer you won’t be played.

Michelle Singletary is a columnist for The Washington Post.