5 Reasons Creditors Raise Credit Card Interest Rates

Credit card interest rates are typically variable, meaning a lender can change the rates during the life of the loan. When a rate changes, it is more likely to go up than down. There are several reasons, some personal and some market-based, that a credit card company may raise interest rates.

#1 Missed Payments

All credit cards require a monthly payment to cover interest charged in a given payment period. This payment is typically very low, only amounting to a fraction of the balance on the card. The payment is charged once a month. Borrowers have no choice but to make this payment in full on or before the day it is due. Even one missed payment results in a drop in credit score, a finance charge and a possible interest rate increase. Chronically missing payments will result in the canceling of a credit card.

#2 High Balances

Aside from monthly payments, borrowers have the chance to pay down balances in a given month. Some borrowers rarely pay down balances, and this results in very high finance fees. Borrowers who maintain a particularly high balance will likely see interest rates go up on the card. To protect against this problem, it is best to maintain a balance under 10% of the total limits on the card. This will not only result in a lower interest rate on this card, but also raise a credit score.

#3 Credit Concerns

When a credit score drops, rates on  variable loans have the potential to go up. This means loans in another area can affect a credit card rate. For example, if a borrower misses an auto loan payment, his credit score will drop, and his credit card interest rate can go up. Seeing the whole picture will help a balance the rates on not just the credit card, but all loans.

#4 Prime Rate Changes

The Federal Reserve sets what is called the "national prime interest rate" throughout the year. This rate is what lenders charge other lenders, and rate changes are designed to help curb inflation and encourage lending. A borrower has no affect on this rate, but this rate has a large affect on a borrower. If the prime rate goes up, there may be nothing a borrower can do to stop his credit card interest rate from doing the same. Banks need to keep retail rates higher than the rates they are spending to finance their own financial growth.

#5 Market Concerns

The credit market is a complicated system of lending between banks, financiers and individual borrowers. The credit market responds to changes in the market as a whole. When the market is in a recession, the credit market will tend to tighten, meaning less loans are distributed and higher rates are charged. A tight credit market can result in a climbing interest rate through no fault of the borrower alone. In general, a bad credit borrower will suffer worse when the economy is slow than a good credit borrower. Maintaining good credit can create a degree of immunity to market swings.

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