Why Does My Credit Card Interest Rate Keep Going Up

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Have you ever opened your credit card statement only to find that your interest rate has climbed higher? It's a scenario that can increase your financial strain, particularly if you're already juggling balances.

In today’s financial landscape, several factors, including shifts in the prime rate and changes in your credit score, can cause these unexpected hikes. This guide delves into the reasons behind rising credit card APRs and outlines practical steps you can take to mitigate the impact on your wallet.

Whether it's through smart balance management or exploring consolidation options, there's a strategy to regain control and keep your debt costs manageable.

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How Credit Card Interest Rates Work

Your credit card's Annual Percentage Rate (APR) determines how much interest you pay when carrying a balance from month to month. The APR and interest rate are essentially the same thing for credit cards. This interest rate can be fixed, meaning it does not change, or variable, meaning it can fluctuate over time. Most credit cards have a variable APR linked to an index rate called the prime rate.

What Factors Determine Your Credit Card's APR?

Several key factors determine the APR you receive when you open a new credit card or carry a balance on an existing card:

• Credit Score: The higher your score, the lower risk you are in the eyes of lenders. Good credit scores can qualify you for lower APRs.
• Credit History: The length of your credit history and how responsibly you've managed debts in the past also impact the interest rate you receive.
• Type of Card: Cards aimed at consumers with excellent credit tend to have lower APRs than cards serving those working to build or rebuild credit.
• Prime Rate: Since most credit cards link to the prime rate, shifts in this underlying rate impact your APR.

Your individual credit report and profile lead the credit card company to assign you a rate based on their assessment of your creditworthiness as a borrower.

How Does Credit Card Interest Accrue?

When you carry a balance from a credit card bill from one billing cycle to the next, interest starts accruing.

Here is how it works:

• Each day, your average daily balance is calculated, including any new charges made and payments or credits received.
• Your card issuer will take your APR and divide it by 365 to get your daily periodic rate.
• The daily periodic rate is then multiplied by your average daily balance to determine the interest owed for that day.
• At the end of your billing period, the total interest accrued that cycle is added to your balance.

If you consistently carry an unpaid balance transfer credit card, interest compounds each month. This means you pay interest on your existing interest, causing balances and interest charges to rapidly snowball. It's a good idea to pay attention to the difference between simple and compound interest to understand how quickly growing credit card balances can get out of hand.

Reasons Your Credit Card APR Can Go Up

You might be wondering, 'Why did my APR go up?' While having a variable rate means your credit card APR can fluctuate regularly, there are specific circumstances that typically trigger credit card interest rates to rise. These include changes in the prime rate, late payments, the end of promotional periods, and shifts in your credit score.

The Prime Rate Changed

As mentioned previously, most credit cards tie your APR to the federal funds rate or the prime rate. This key rate also shifts based on economic factors and Federal Reserve decisions. When the prime rate rises, so will the rate hike your card's variable APR, typically within one or two billing cycles. For example, if the prime rate increases by 0.25% and your card charges prime plus 10% APR, your new rate will be 0.25% higher.

These hikes are directly tied to moves from the nation's central bank. As of November 2022, the Fed has raised rates six times in 2022 alone in an effort to slow economic growth and curb rising inflation. Additional rate hikes are expected moving forward as well.

You Made a Late Payment

Paying your credit card bills late leads to more than just late fees; it can also cause your credit card bill late APR to spike significantly. Many credit card companies will impose penalty APRs in excess of 25% if your payment is 60 days past due. Others may trigger a penalty rate with just one late payment.

This new sky-high interest rate applies to both existing balances and new transactions.

Cardholders often get stuck with penalty rates for 6 months or more unless payment habits improve significantly. Stay diligent about making at least the minimum payment by the due date each month to avoid both late fees and interest rate penalties.

Your Introductory Offer Ended

Balance transfer and 0% introductory APR offer, such as an 'offer 04 promotional APR ended', seem enticing and provide temporary financial relief. However, it's crucial to be aware that these promotions don’t last forever. 

Once the introductory offer concludes, typically after 12 to 18 months, your APR will revert to the standard rate, which can be significantly higher. It's critical not to overspend just because you have no interest charges during an intro period.

Keep track of when regular APR terms take effect to avoid getting stuck suddenly paying 20% or more interest on existing debts. When the 0% offer expires, new purchases and remaining balances revert to your normal variable APR based on the same factors that determine your rate initially.

Your Credit Score Dropped

As card companies review your account periodically, significant decreases in your credit score may lead them to deem you an increased credit risk. As a result, they are likely to protect themselves by raising their APR. This typically occurs in increments based on your profile and risk level but can leave some borrowers with a doubling of their interest rates or more in some cases.

You'll receive a written notification well in advance indicating your new rate and when it takes effect. Be sure to review these notices carefully and explore ways to improve your credit standing over time. Paying balances down proactively can also help offset higher APR impacts.

When Your Credit Card Company Can Raise Your Rate

In most cases, credit card companies cannot arbitrarily decide to jack up your interest rates unexpectedly. However, there are specific scenarios where your credit card issuer still has the right to increase your APRs.

After a 12 Month Introductory Period

Balance transfer or promotional 0% APR periods often last 6-12 months for new cardholders. Once this introductory period ends, card companies can raise rates to standard variable terms. This applies to both remaining transferred balances as well as new purchases.

60+ Days Late on Payments

As mentioned earlier, making late credit payments 60+ days past the due date triggers penalty APRs from most credit card issuers. This also allows them to apply the considerably higher interest rate to existing account balances.

Credit Score Drops Substantially

A significant drop of 100+ points in your credit scores may indicate increased risk to your card company. In response, they can raise rates to compensate, typically to around prime + 25% or more depending on factors like your payment history.

Variable Rate Tied to Prime & Prime Rate Increases

Since prime rate changes directly cause corresponding variable APR adjustments, major federal reserve moves like the 2022 rate hikes trickle down to consumers. Prime-linked card rates rise in lockstep with these federal rate changes.

It's Been At Least 12 Months Since Account Opening

Card companies cannot arbitrarily raise your rates in the first year after opening your account. However, after hitting the 12-month mark, your APR can be increased even without other risk reasons like late payments or credit score drops.

Now that we've covered various ways your rates can climb higher, let's discuss some steps you can take to handle the financial impacts...

Steps to Take When Your Interest Rate Increases

Seeing your credit card APR shoot up unexpectedly can be stressful. Luckily there are a few options at your disposal to handle climbing interest rates proactively.

Pay Down Credit Card Balances

The higher your credit card balance, the greater the impact as interest rates rise further. Developing a plan to pay down debts can help limit added interest expenses. Popular strategies include the debt avalanche method (paying high-APR debts first) or the debt snowball method (paying smallest debts first). Reducing balances protects you from multiplying interest costs over time.

Consider budgeting, adding income streams, selling unused items, or consolidating debts to accelerate paying off credit card balances. Each extra dollar toward existing debts today saves multiples in avoided interest later.

Transfer Balances to a Lower APR Card

For consumers still working on paying down substantial card balances, transferring to a lower APR credit card can provide temporary relief. Numerous cards offer 0% intro APR periods around 12-15 months.

Just be mindful of potential balance transfer fees in the 3-5% range based on amounts moved over. Do the easy math to ensure savings exceed any balance transfer fee costs. And have a plan to pay off amounts in full before rates jump back up after the intro expires.

Consolidate Debt with a Personal Loan

Personal loans allow you to consolidate credit card balances into fixed-rate installment loans over 2-5 years on average. This locks in set interest rates and monthly payments so fluctuations don't lead to budget chaos.

Shift high-interest variable credit debts into more predictable, fixed interest rates on personal loans. Just be sure to avoid putting new charges on paid-off credit cards after consolidating!

Negotiate with Your Card Issuer

It never hurts to call your credit card company with some financial sob stories to request Lifetime of the Prime updates and negotiations once rates creep higher over time.

Highlight good payment history and credit scores and kindly request better terms. Consider requesting graduated increases over time rather than dramatic hikes all at once. The worst they can do is say no!

Avoiding High Interest Rates Altogether

While economic factors lead interest rates to fluctuate over time, you aren't necessarily stuck paying sky-high credit card APRs forever.

Pay Statement Balances in Full Each Month

When it comes to credit card interest, the best defense is avoiding it completely. Pay your full statement balance by each due date to never pay interest charges. Without lingering balances, rate changes won't hit your wallet quite as hard.

automate payments or set calendar reminders to pay your bill on time without rolling unpaid balances between billing cycles.

Shop For Low-Interest Rate Credit Cards

While paying in full routinely is ideal, life happens. Choosing fixed rate cards around 11-15% can save substantially over variable rate cards charging prime plus 10% or more routinely. Locking lower rates, especially during debt payoff periods, helps restrain interest costs.

Keep Credit Card Balances Low

Utilization (balances versus credit limits) also indirectly impacts the interest rates you pay. Keeping your average credit card debt and balances under 30% of total credit limits helps your credit score and long-term eligibility for lower-interest accounts with better terms.

Monitor Credit Reports Regularly

Enroll in free credit monitoring services to track your reports and scores monthly. Rapid notification of changes helps you dispute errors and promptly address dips that could spur APR increases. Maintaining great credit means access to the lowest interest rates.

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