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Credit Card Applications » News » Other » New Interest Rate

New Interest Rate

April 09, 2009
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Hit by Higher Credit Card Rates? Don’t Rush to Cancel!

As the credit crunch rages on, more and more American consumers are being hit by new interest rates which are sometimes doubled from their previous levels. Such increased interest rates are affecting not only defaulting cardholders, but also those who always pay their bills on time.

It is most likely that when you receive a note from your bank stating that your card interest rate will be raised, you’ll start thinking about canceling the credit card. However, financial experts advise that you take the time to consider all possible options available to you in your particular situation.

Certain negative and positive effects result from closing a credit card account, and you should be aware of them to make an informed decision. Of course, the highest and best decision should be made only after evaluating the extent of the damage or benefit to your credit score that you will experience by canceling the account.

Let’s start with possible negatives. First, your credit score will inevitably drop if the account closed is one of the oldest and best accounts on your credit record. Remember that by closing an account you cut your credit history which is an important part of your credit report.

Your credit score will also get a hit if closing your card account results in an increase in your credit utilization ratio. A credit utilization ratio is the proportion showing how much credit you’ve already used compared with the amount of credit still available to you. When you cancel a credit card, your total available credit is reduced, while the debt owed remains the same. Therefore, if you do decide to close the card due to its newly-elevated interest rate, make sure that your debt-to-credit ratio will not be too high to qualify you for a good new card.Yet another negative effect of closing your card account is that you can no longer access funds available on that credit card.

The positive effects of closing a high rate credit card are more than evident. The most important is you won’t have to pay hundreds of dollars more each month in new interest rate charges. This is because U.S. law allows you to pay your debt off at the previous rate if you intend to close the card thereafter. By closing your card account, you will also stop adding to your balance and thereby increasing the time necessary to pay it off.

Take into account all of the factors that can affect your credit rating before canceling your credit card. Also evaluate your current financial situation and the resources you have available to pay a much higher interest rate. Analyze the new higher rate’s impact on your ability to meet your other financial obligations. If you conclude that the consequences of the higher interest rate are worse than the effects of closing the account, feel free to close the card account. Overall, make sure you are doing all that you can to protect your credit score, your finances and your future.

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