Even banks make mistakes. While you might be dreaming of seeing a couple of zeroes added to your savings balance overnight, bank errors can go the other way, too.
That's what happened recently at Citigroup (NYSE: C), which announced in February that an internal error caused the company to overcharge 1.75 million credit card accounts on their annual interest rates.
Luckily, Citigroup not only caught the error, but came forward and refunded a total of $335 million to the cardholders affected -- an average of $190 per customer. Unfortunately, that may not always be the case, so it's up to consumers to monitor not only their account balance, but their interest rate as well.
How can banks overcharge you in interest?
There are legal procedures that credit card issuers must follow when setting and changing your interest rate. The Credit Card Accountability Responsibility and Disclosure Act of 2009, or the CARD Act, set out additional regulations to protect consumers from being overcharged in interest rates and fees.
For example, the CARD Act places limits on interest rate hikes on existing balances. Issuers can only increase your interest rate on an existing balance under a few circumstances, such as when a promotional period ends or when you are 60 days late on your payment. They must give you 45 days' notice and the chance to opt out. Even if you have a variable interest rate, your issuer does not have free reign to increase your interest rates at will. You should see only slight fluctuations in correspondence with the prime rate, which increases along with the federal funds rate.
Additionally, if you receive an interest rate hike due to a late payment, you are legally eligible for a reduction after six months of on-time payments. Card issuers must review your account, and you should see a decreased APR after that.
This is where Citigroup made a mistake. According to the company's statement, it found that its method for automatically reviewing accounts for an interest rate reduction was flawed. About half of the cardholders affected didn't receive any interest rate reduction after six months of on-time payments, and the other half received a reduction that should have been greater.
This is how 1.75 million Citigroup cardholders were overcharged for years without even noticing it.
How to make sure your interest rate is fair
Citigroup caught this error during a routine internal review and came forward, agreeing to issue refunds to all parties involved. But what if your bank doesn't catch, or admit to, its errors? What can you do to make sure you're not being overcharged?
- Monitor your interest rate. You'll find your current APR on your credit card statement. If you notice this number increasing substantially without reason, call your card issuer's customer service line right away and ask them why your APR has been increased. Remember, even if you missed a couple of payments or received a big hit to your credit score, the issuer must give you 45 days' notice before increasing your interest rate.
- Check in with your issuer six months after a late payment. If you were more than 60 days late on a credit card payment, and you received 45 days' notice of an interest rate increase, set an alert to check back in six months later. After paying your bill on time for six months, you should see an automatic decrease in your interest rate. If your interest rate remains the same or is still significantly higher than what you were paying before, request a rate decrease.
- Call your issuer and ask for an interest rate reduction. There are many ways to lower your interest rate, even if your issuer is already following the law. For example, if you received a rate hike due to a substantial decrease in your credit score, call your issuer back when your credit score has improved significantly. At that point, you should be able to negotiate a lower interest rate.
- Close your account. If you think you're being charged an interest rate that is unfairly high, and the credit card issuer refuses to budge, you can always close your account. According to the CARD Act, credit card issuers must give you notice of an increased interest rate and allow you to opt out of the increase by closing your account. You can do this even if you're carrying a balance; closing the account will allow you to repay the balance at the lower interest rate. Of course, you won't be able to use the card anymore.
- Don't carry a balance. The simplest way to avoid being overcharged in credit card interest fees is to simply not carry a balance. While emergencies and tight finances sometimes make it necessary, it's always in your best interest to pay your balance off in full each month and avoid interest fees altogether.
If, after learning about your rights under the CARD Act, you think they're being violated by your credit card issuer, then it's important to confront the issuer. If you don't get a response, you can submit a formal complaint to the Consumer Financial Protection Bureau, which will investigate your claims and seek a resolution.