Reading the fine print of a credit card agreement probably ranks pretty low on your to-do list, if it makes it there at all.
But as a result, you could be unaware that your card's annual percentage rate (APR) — the price you pay for borrowing money from your credit company — may be subject to increases. That can make for a rude awakening if the rate skyrockets with what seems to you like little or no warning.
If you don't carry a balance, you may not even notice an increased APR. But if you carry debt on your card from month to month, an increased APR could mean that your interest payments are significantly higher.
Here are five causes of credit card APR-increases to watch out for:
1. The promotional rate is ending
Many cards offer low interest rate promotions to attract customers. But that special APR offer doesn’t remain in place forever.
“These promotional rates usually last six to 12 months after opening the account,” said Michael Sullivan, a personal financial consultant with Take Charge America, a national nonprofit credit counseling and debt management agency. “Read the fine print so you’re not blindsided after securing a new card.”
2. You’ve made late payments
Have you fallen behind on a credit card payment? If so, your card issuer may impose a higher APR.
Many cards charge a one-time penalty (such as $40) if you’re less than 60 days late, said Jim Miller, vice president, Banking and Credit Card Practice for J.D. Power. But once you hit the two-month delinquency mark prepare for more significant penalties.
“The issuer can only increase the interest rate if the cardholder is more than 60 days past the due date for the payment,” said Miller. “The issuer must notify the cardholder of the reason for the interest rate increase, and if the cardholder makes payments on time for six months the issuer must terminate the increase.”
Note that card issuers may also increase your APR if you consistently run a balance above the card’s limit.
3. The card came with a variable APR
Some credit cards come with a variable APR from the outset, meaning the rate changes based on an interest rate index, often the Prime Rate, said Miller.
“The index cannot be controlled by the credit card issuer,” Miller explained. “As the rates increases, the rate on the card will increase. For example, you may have a variable rate of Prime Rate plus 12%. The current Prime Rate is 5.5% so the rate on the card would be 17.5%. If the Prime Rate increased to 5.75% the credit card rate would increase to 17.75%.”
4. You’ve had a significant credit score decline
Know this: credit card issuers intermittently monitor your credit score, said Sullivan.
“If you experienced a substantial drop in your credit score, your card issuer might respond by increasing your APR,” Sullivan said. “If your score improves afterwards though, the issuer must consider reducing your rate.”
What’s more, the credit card issuer can only increase the interest rate on new purchases, added Miller. They cannot change the rate on existing balances (other than a normal increase for a variable rate APR).
“The issuer also has to notify you 45 days before the rate increase on new purchases takes effect,” said Miller, adding that after six months the issuer is required to review your account for a potential rate decrease if your score has improved.
5. You’ve had the card at least 12 months
Interest rate increases are primarily dictated by the Credit Care Accountability Responsibility and Disclosure Act of 2009.
The CARD Act does not allow issuers to increase the interest rate during the first year of your agreement, unless the prime rate increases or the cardholder is late on a payment by at least 60 days, said Miller.
“After the first year the issuer can increase your interest rate for no reason at all, but must notify you at least 45 days in advance,” he said. “The credit card industry is very competitive so issuers don’t generally raise rates without a good reason.”
Image: H. Amstrong Roberts