Did you know that your bank isn’t allowed to just raise interest rates on your credit card as they wish? Did you even know that you have legal rights when it comes to credit card interest rates?
The Credit CARD Act of 2009 greatly improved consumer rights when it comes to credit card companies. Even though the CARD Act was passed back in 2009, many consumers still aren’t aware of those rights.
This is a problem because credit card companies do sometimes infringe upon these rights, whether knowingly or by accident. Recently, an announcement made by Citigroup stated that they had accidentally been charging unfairly high interest rates to 1.75 million credit card accounts for seven years. After finally catching the mistake, they refunded cardholders for a whopping $335 million in overcharges.
It makes you wonder how many credit card companies are making mistakes and not catching them. Here are the rights you should know when it comes to your credit card so you can avoid being overcharged, or worse.
- There are no legal limits on credit card interest rates
Unless you bank with a credit union, which is limited to charging a maximum APR of 18%, there are currently no federal laws in place that limit the interest rate that banks can charge on credit cards.
The only thing that prevents banks from charging sky-high interest rates is consumers. After all, if a credit card company were to charge a 79.99% APR, there would be almost no demand for their product. Credit card companies also compete with each other for customers, and in theory, the credit card with the best terms and lowest interest rates will win the most customers.
In practice, this is only true if consumers are informed. If you don’t bother to do your research before applying for credit cards and racking up debt, credit cards can charge any interest rate they please. This is why it’s important to do research and compare cards to get the lowest interest rate available to you.
- If your interest rate increases because of late payments, credit card companies must decrease it if you pay on time
Credit card companies are allowed to apply a penalty APR to your credit card debt if you are 60 days late on a payment. This penalty rate can severely impact your ability to pay off debt, as a typical penalty APR is about 29%, and many credit cards charge well over 30%. However, if you’re an otherwise responsible consumer who slips up once and misses a payment by a few days, they can’t charge a penalty rate.
What’s more, they’re required to reevaluate your interest rate after six months of on time payments. If you’ve been paying at least the minimum for six months in a row, your credit card company must remove the penalty and bring your interest rate back down to the standard rate.
This was the mistake that Citigroup made. They neglected to review accounts after six months and appropriately reduce interest rates for customers who had paid on time.
- Credit card companies must notify you 45 days before raising your interest rate
The act also requires that credit card companies send customers notice at least 45 days before any major changes to their account terms. They also have to allow the customer to opt-out of the change in terms by closing their account. So, if your credit card issuer notifies you of an increase in your APR, you can opt to close your account and pay off the balance at your old interest rate.
However, if the rate increase is a penalty increase due to delinquency or default, your credit card issuer does not have to give you any notice. They also don’t have to give you the option to opt-out of a penalty increase, so make sure you always pay your bills on time.
- Your interest rate can’t be increased within the first year of opening an account
Significant changes in your account terms, such as an interest rate hike, cannot occur within the first year of opening the account. Exceptions to this rule include penalty interest rates for late payments and the end of a promotional period. However, law now requires that even low introductory interest rates last at least six months.
- Your money always goes toward paying off your highest interest balance
Sometimes you’ll have multiple different interest rates all associated with one account. For example, regular purchases will be charged at the standard interest rate, but cash advances typically come with a higher interest rate. Balance transfers may be offered at a lower interest rate. Each time you make a payment on your credit card balance, that payment is required to go toward paying off your highest interest balance first.
It’s important to note that if your credit card has a variable APR, which most do, you will see slight changes in your interest rate on a regular basis. Those changes should typically follow changes in the prime rate, which is based on the federal funds rate set by the federal government. They should never be drastic.
If you notice a drastic change in your interest rate despite and you aren’t at least 60 days late on a payment, contact your credit card issuer immediately. They should be able to explain what happened to you, and if it’s an error, it should be corrected retroactively. If you still feel your rights are being denied by the credit card issuer, you can file a complaint with the Consumer Financial Protection Bureau.
While there are still plenty of ways in which credit card companies can take advantage of consumers, knowing your rights, reading terms and conditions, and shopping around for the best credit card offers will make sure that you don’t fall victim to predatory credit card terms.