Why is My Credit Card Company Raising My Interest Rate?

Reader Question: I just got a letter from my credit card company that said they were raising the interest rate on my credit card, even though I've never missed a single payment before. Why is this happening?

As the U.S. economy continues on its downward slide, so do the profits of the credit card companies. They are looking for any way to maximize their profits and minimize their risk in a financial environment that could produce record losses for the credit card companies. Raising interest rates on their customers is one of the ways they are maximizing their profits.

American Express recently announced a 2% - 3% interest rate increase across the board to offset the expected increase in their charge-offs. Some credit card holders have recently seen their interest rates double, even though they have paid more than the minimum payment and have always paid on time (i.e., they are loyal customers).

It appears the credit card companies expect us, their loyal and reliable customers, to help them cover their losses. I guess that's just business. Also in the works is a new regulation that will ban the credit card companies from raising interest rates on existing balances. This legislation is expected to be adopted by the Federal Reserve by the end of 2008, and it could be another reason for the sudden across-the-board interest rate hikes by the credit card companies.

Not only are credit card companies raising interest rates on their customers, but they are also lowering credit limits for many of their card holders. This means that some people will be paying higher interest on their outstanding balances, while also discovering that they are suddenly "maxed out" on credit when they need it the most. Having your limit lowered could also have a negative impact on your credit score, because it will make your utilization ratio seem higher. This ratio compares your available credit to the amount you are currently using, and it accounts for about 30% of your credit score. A lower score can hurt your chances of getting other types of financing such as car loan and mortgages.

So, you are not alone in this dilemma, and there may not be much you can do about it -- other than reducing your credit card usage, or paying them off and closing them. But, in a time when budgets are getting tighter and many are struggling to get by, it may not be possible for most consumers to do either of these things. If you are a long-time customer and have always paid your bill on time, it might not be a bad idea to call the credit card company and ask them to reconsider their rate hike. If this doesn't work, transferring your balance to another card with a lower rate may also be an option for you.

Hope that helps you out some. Good luck.

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