If you've ever tried to dig yourself out of credit card debt, you might already know about a practice that some lawmakers denounced this week -- the policy among some credit cards to raise your interest rates when your credit score drops, even if you're faultlessly punctual with your payments.
Unfair? Many credit card companies say the tinkering keeps your interest rates in line with your ever-changing creditworthiness, as measured by your credit score. That's fair, I think, if they don't just punish your misdeeds but also reward improved behavior with lower rates. But there's scant evidence that's the case.
Out in the open
All this congressional attention may make the practice less widespread, and companies may well change their ways after Tuesday's committee hearing. The Associated Press reported that Citigroup (NYSE: C ) , JPMorgan Chase (NYSE: JPM ) , and Capital One (NYSE: COF ) do not use, or will discontinue, the practice.
But if you've seen an otherwise baffling increase in your credit card's interest rate recently, this may explain the change. Maybe your credit card company happened to peek at your credit score when it was temporarily down. Although you're entitled to see your credit report at no charge, your score remains invisible to you unless you request and pay for it, so you can't automatically watch your score rise and fall. Moreover, your score can change even after seemingly unimportant events, such as if you close an account you haven't used in years.
If you never carry a balance on your credit card, this remains an interesting but mostly irrelevant matter. But if you do carry some debt, you stand to pay dearly when a blip in your credit report gets translated into an interest-rate increase.
Improve your credit
When fixing credit woes, it's paramount that you try to polish all aspects of your creditworthiness to a sparkling shine. Even if your current credit terms don't change with a worsening credit score, your future terms will suffer. Your card company may raise your rate when your agreement renews, even if it doesn't stick you with an increase earlier.
It's a tedious slog, but vigilant attention to your interest rates and credit score can pay you back in cash. Anyone repairing their credit or paying down a mountain of debt can get a ton of good advice and tough love from experienced Fools on the Credit Cards and Consumer Debt discussion board.
Work through these steps to get started:
- Clean up any mistakes on your credit report, particularly those that could count against you. You have the right to request one free credit report each year from the three major monitoring agencies. Each has a process for disputing incorrect information.
- Start mending your ways, beginning with a commitment to make your payments on time every time. Credit card companies won't hesitate to raise your rates if you show a pattern of late payment. If you've slipped up here in the past, talk to your credit card company. Many will lower your rate after you've made a string of timely payments.
- Chip away at the interest rates on your debt by requesting lower rates or finding better terms with other cards. You'll have more success as you clean up your credit reports and show you've become a less-risky borrower.
- Hunt for balance transfer offers that can cut your interest rates dramatically, but beware of fees for moving your debt. Ask fellow Fools on the discussion board to help you figure out the fine print.
Remember, too, that you can often reject an interest rate increase by closing your account, but that's not without its own complications. You'll probably be required to pay off the debt, and, if it's an account you've held for a long time, you might take a hit to your credit score.
Keep reading to get the scoop on using credit Foolishly and see: