If a customer chooses to reject a credit card rate increase, they will need to close their account with their provider within 60 days.
They could choose to enter into a payment plan arrangement with their existing provider or look around for a new credit card or personal loan to help pay the debt off.
Credit card providers increase interest rates based on general economic conditions as well as the changing risk of a borrower being unable to pay.
Can a credit card company increase the interest rate?
A credit card company has the legal right to increase the interest rate for cardholders. If a provider does change interest rates, it applies to all credit on the account including all money already owed as well as future spending.
We go into the reasons why they might make this increase below, but the important thing to remember is that a credit card company is within their rights to alter interest rates.
For credit card customers, that means they may receive a letter explaining an increase is going to take place at any time, although there are principles under the Lending Code that provide some protection for customers.
Rules around credit card interest hikes
A credit card provider must give at least 30 days' notice before they increase a customer's interest rate.
Along with mandating that customers are given at least 30 days' notice before an increase to their interest rate, credit card providers must also explain:
- Exactly what the interest rate changes are going to be
- How much it's going to cost a customer
- What options a customer has
These explanations should be provided in writing (usually a letter or downloadable document from a credit card app) and they must be written in clear language. There shouldn't be any jargon or anything in the letter that might be unclear to the average reader.
At the same time, there are principles that the credit card industry agreed to surrounding what they shouldn't do when considering credit card rate increases:
- They should not recalculate based on a customer's risk level within the first year of a card being taken out. However, they can recalculate based on general repricing changes (more on this later).
- Unless there are exceptional circumstances such as sudden changes in the economy, card providers will not increase a customer's interest rate more than once every six months.
There is one more principle too: customers must be given the right to reject a credit card rate increase.
Rejecting a credit card interest rate increase
If customers do not want to accept an increase to their credit card interest rate, they can choose to reject it.
However, this doesn't mean that the credit card company will simply keep the interest rate as it is because a customer doesn't want it to change. Instead, there's a set of rules around what rights a customer has in this situation.
If a customer chooses to reject a new interest rate within 60 days:
- The credit card account will be closed
- The customer will be required to pay back any money owed at the existing rate
So, choosing to reject an increase to the credit card interest rate will trigger an account closure and mean the customer needs to pay back the money owed.
It's important to point out that customers must be given a reasonable amount of time to repay the money, but there are no set rules on how long is considered 'reasonable'.
What is clear is that customers will no longer have a credit card with their provider, so what are the other options in these circumstances?
After rejecting a credit card rate increase
Some customers will be able to repay the amount outstanding on their credit card immediately when they choose to reject the rate increase. This means the account will be closed immediately and they will no longer have a credit card with that company.
However, many customers will not be in a financial position to pay off all their credit card debt in one lump sum, so they will need to consider how to settle those debts.
Here are some options that may or may not be suitable depending on a cardholder's circumstances.
The letter sent by a credit card provider explaining the rate increase should provide some options to help customers pay off their outstanding debt if they choose to reject the increase.
These could include:
- An agreement to pay off the debt over a set period of time - this may be negotiable so it's worth checking to see extending the term is an option
- Transferring the balance to another lending product offered by the provider such as a personal loan at a comparable (or sometimes lower) rate
If a customer chooses to accept one of the lender's proposals, they should be sure to read the small print and see if there any charges involved in transferring the balance.
It's also true that it may not be most economical or the easiest way of settling the debt.
For example, if the existing credit card provider suggests the customer move over to a personal loan account with a high fixed APR, it could be worth looking at other options to settle the debt instead.
Other credit cards
Customers with outstanding balances on their credit cards may consider transferring that balance to another credit card using a 0% balance transfer deal.
If another provider is willing to transfer the debt over to one of their credit cards, that could be a good way of avoiding a rate increase at an existing provider, although be aware that balance transfers do have fees attached - plus the interest rate when the 0% promotion wears off can be steep.
Bear in mind that balance transfer credit cards are based on personal eligibility as much as any other card.
So, if our existing credit card provider has increased our interest rate based on our personal circumstances, this could mean that we'll get unfavourable rates elsewhere too.
An unsecured personal loan can be one of the cheapest ways of borrowing.
If a customer is able to get a personal loan and uses the loan amount to pay off their credit card debt, it could mean that they will have a straightforward monthly payment to budget for that will be lower than the repayment schedule suggested by their credit card provider.
Again, though, whether a customer is successful in applying for a personal loan depends on their circumstances and it can be tricky to get a good APR with a poor credit history, for instance.
Remember that providers only have to advertise an APR that is available to at least 51% of their customers, but that still means that 49% of customers won't get the representative APR.
Why do providers increase credit card interest rates?
Credit card providers can only increase the interest rate of a credit card if there is a valid reason to do so under rules set out in The Consumer Credit Sourcebook (CONC) published by the Financial Conduct Authority (FCA).
Valid reasons include:
- Genuine increased costs of providing credit
- An increased risk that the customer will be unable to repay the debt
The first of these is known as general repricing and is based on issues in the economy. The second is known as risk-based repricing and is based on whether a credit card company believes a customer's risk level has changed.
We discuss this in more detail in our guide to risk-based repricing on credit cards, but it's important to understand that there are various factors a provider can look at when deciding whether to increase the interest rate for an individual (or a group of individuals with similar characteristics).
However, while the FCA rules say a customer can request a suitable explanation for a sudden interest rate hike, they also say that providers can supply a generic explanation.
So, a credit card company does not have to point to a specific factor to explain why they have decided to raise interest rates. They can simply say it's based on the reassessment of credit risks affecting their business.
There are few things customers can do in this situation but checking their credit score to understand whether there is a wider issue with their credit rating could at least help to explain if there's something lenders are seeing that could be putting them off.
It's possible to get a free trial on credit check websites to get more insight into how our credit score is performing and what detail the agencies are using to make their judgements.
Summary: Right to reject is useful
If a provider suddenly decides to increase the interest rate on our credit card, we do have the right to reject that increase and close our account.
We get 30 days' notice before an interest rate hike comes into force, plus we have 60 days to decide to leave.
The problem for many customers is that the options after rejecting a credit card rate increase are slim:
- Settle the outstanding balance in full immediately
- Settle the balance using a payment plan through the existing provider
- Transfer the credit card balance to another provider
- Take out a personal loan to cover the debt
There are also other options that risk getting a customer into more problematic debt such as payday loans which have a much higher rate of interest than most credit cards.
So, while we may have the legal right to reject a credit card interest rate increase, that doesn't always mean it's going to be option for all customers.
Many people will end up accepting the interest rate hike simply because they have no alternative.
In those instances, it's worth stepping back and taking a look at the ways to handle debt and formulate a plan to get rid of that specific credit card - and maybe improve your credit rating overall to get better credit options in the future.