By Elliot M. Kass | American Express Credit Intel Freelance Contributor
5 Min Read | September 22, 2020 in Cards
There are a number of reasons why your credit card’s APR may change, and some of these are outside your control.
Some changes are insignificant – especially if you’re paying off your full balance on time each month.
But if your APR goes up substantially, there are several things you can do to minimize the impact.
The number one reason people apply for a particular credit card is that it offers an attractive annual percentage rate on purchases, better known as the APR.1 While credit cards usually have multiple APRs – an APR for purchases and different APRs for cash advances, balance transfers, and introductory rates – it’s the purchase APR that concerns most people. Purchase APRs aren’t set in stone, and as time goes on your card issuer may raise or lower it – although lowering happens less often.
The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 regulates the conditions under which a credit card issuer may change your card’s APRs.2 It also requires that they alert you to changes in advance, except under certain conditions. Even so, card APRs rise and fall all the time. Let’s take a look at five common circumstances under which your card rate can change, and what you might want to do about it if it does.3
It’s smart to take advantage of a new 0% intro APR credit card promotional offer to finance a big purchase or transfer debt from a card with a higher rate. But the 0% introductory rate will typically only last for six to 12 months before a higher rate kicks in. How much higher depends on various factors – but the most important is likely to be your credit score. The average APR for all U.S. credit card account holders was 14.52% in May 2020, and usually hovers around 15%.4
And take note: While the CARD Act requires issuers to provide at least 45 days' notice before changing the terms of your account, an expiring promotion is exempt from this rule. Keeping tabs on when the intro rate ends and the new APR kicks in is up to you.
Paying a credit card bill late usually triggers a late fee and can lower your credit score. What’s more, once you’re 60 days or more overdue your card issuer has the right to impose a penalty APR, which could be as high as 29.99% and apply to the entire balance on your card. In most cases, the CARD Act doesn’t allow the interest rate on an existing balance to rise. In other words, if your APR goes up, the new rate will apply only to new charges going forward. But this doesn’t hold if the higher APR is imposed as a penalty, in which case the new rate can apply to your outstanding balance as well. On the flip side, if you make at least the minimum payment for six months, the card company is obligated to remove the penalty APR.
If your credit score drops substantially, your card issuer is entitled to increase the APR. Fortunately, you will get advance notice of at least 45 days that this is about to happen, giving you an opportunity to pay down your outstanding balance or find a new card with a lower rate. The card company is also obligated to reassess this every six months, so if your score goes back up your rate may come down again.
The APR on most credit cards is variable and is tied to the prime rate, which is the rate banks charge their best customers. If the prime rate goes up, your credit card APR will follow suit. And if the prime rate falls your credit card APR will also decline. For a deeper dive, read “How Fed Rate Cuts Impact Your Credit Card Interest Rate.” Because minor fluctuations in the prime rate are common, you may not receive advance notice of these APR changes, which are usually quite small. If you don’t have an outstanding balance on your card – or if your balance is small – you may not to even notice the change.
If your APR goes up, there are several things you may want to do:5
There are a number of reasons why your credit card APR may change, and more often than not it will go up, not down. But if you use your card responsibly, you may not even notice the change, and there are steps you can take to minimize any impact.
1 “This is the No. 1 reason people switch credit cards,” CNBC.com
2 Credit Card Accountability Responsibility and Disclosure Act of 2009, Federal Trade Commission
3 “5 Reasons Your Credit Card’s APR Could Change,” The Ascent
4 “Consumer Credit – G.19,” U.S. Federal Reserve
5 “Why Did My Credit Card Interest Rate Increase?,” U.S. News & World Report