Why the Sudden Spike in My Interest Rates?

January 18, 2016

Photo credit: Oleksiy-Mark-iStock-Thinkstock-e1462568652789

On December 17, the Federal Reserve increased the Federal Fund rate to .25 percent from zero percent, where it had been sitting for nearly 10 years. Most people considered this positive news, as it was evidence the economy was back on solid ground.

As a result of the interest rate increase, financial commentators explained, consumers should begin to see interest rates climb on new mortgages and auto loans. Savings accounts with interest rates hovering just shy of zero percent for years now, in theory should begin also increasing their rates.

A few days after this announcement, I received a notification from Mint that the interest rate on my last remaining credit card had increased. Surprised, and miffed, I knew there had to have been a mistake. I had not missed a payment, my credit score had not taken a sudden plunge, and there was no promotional interest rate to be ending. Why the increase and why was it effective immediately? This couldn’t possibly have anything to do with the Federal Reserve increase. Right?

Jumping to assumptions is usually followed by an apology from me, so I did some research before calling my credit union. I learned that credit cards have to follow some rules regarding interest rate increases as a result of The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, signed into law in 2009. One of those rules is that an issuer cannot change the interest rate without a 45-day notice—in most cases. For example, after a late payment, the issuer can increase the interest rate, but only if they notify the cardholder 45 days in advance. This timeframe is designed to give the cardholder an opportunity to find a lower interest rate card before the new rate kicks in.

Seconds from calling the credit union, I decided to dig deeper into the cryptic phrase ‘in most cases’. The 45-day notice does not apply when an issuer raises an interest rate on variable rate credit cards as a result of the Federal Reserve increasing the Federal Rate. The issuer had increased my interest rate by .25 percent to reflect the Federal Rate increase—effective immediately. No 45-day day notice necessary.

“I have a fixed-rate card,” I thought. “This shouldn’t apply to me.”

Wrong again. My credit card has a variable interest rate, and I had missed that piece of information when I had done a balance transfer.

Credit cards with fixed interest rates are more difficult to find as a result of the Credit CARD Act. While the law gave consumers protection from whiplash-inducing interest rates and shifty practices, it forced banks and credit card companies to protect themselves in response to the new regulations.

The Credit CARD Act, not surprisingly, made it more difficult for creditors to increase the fixed interest rates on their credit cards. Changing an interest rate on a variable rate card requires creditors to jump through fewer hoops. Hence the transition away from fixed rate cards.

I had a relatively low interest rate of 6.25 percent on my credit card, and now it’s 6.5 percent. This change is not going to affect the length of my debt payoff plan. I’ll owe a few more dollars when all is said and done. What this change does is stoke the fire in me to do whatever else I can to get out of debt even more quickly.