Question: Can Credit Card Companies Change The Interest Rate You Pay?

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Feb 25, 2015
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Credit Cards, Current Events

Answer:  Yes.

A good reminder today that they can. American Express announced that it will be raising interest rates by an average of 2.5% on over 1 million of their customers (Bloomberg):

AmEx told more than a million customers this month that their annual rates will climb an average of 2.5 percentage points, following a review last year, said people briefed on the move. The firm sent letters saying it’s making adjustments after finding their rates were below those for rival cards held by borrowers “with similar credit profiles,” according to a copy obtained by Bloomberg News.

If their explanation sounds a little fishy to you, in this era of Big Data, you are not alone.  Recall last week’s news that AMEX was losing their exclusive agreement with Costco and suddenly this looks like a strategy to plug that hole.

How frequently do credit card companies increase rates on their customers?

Such moves have become uncommon at major U.S. lenders. Banks typically make large-scale changes in response to broader shifts in interest rates or risk, said Oliver Ireland, a former Federal Reserve lawyer who monitored industry practices there…

How much notice do credit card companies need to provide?

A 2009 law known as the CARD Act limited banks’ ability to raise interest rates and established rules for notifying customers of changes. Lenders must tell clients at least 45 days before a rate increase, and customers can opt out or end their relationship.

Recall also that most credit cards are variable-rate products, meaning that they are priced based off a index, such as Prime Rate (currently 3.25%).  So, when the Prime Rate rises, the credit card’s interest rate will rise in lockstep with it.  With interest rates pinned close to 0% by the Federal Reserve for almost seven years and hints of an increase coming, more of these interest rate increases could be coming.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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