How to react to an interest rate hike

By Emma Lunn

You're a loyal credit card customer, and you always pay your statement balance on time. So why did your credit card company suddenly raise your interest rate?

So called "rate-jacking" has happened frequently over the past few years, with credit card firms including Virgin Money, American Express and Barclaycard raising public controversy after writing to customers to inform them the interest rate they pay on their debt is going up.

Such letters generally arrive without warning and can seem like a kick in the teeth to borrowers who may think they have done nothing wrong. Still, even if you're making your payments on time, your behaviour on other loans might provoke a rate increase.

"Credit card companies continuously monitor the credit profiles of their customers, and if they see a deterioration or signs of financial pressure, they may increase your rate if they view you to be a greater risk," says Andrew Hagger of MoneyComms.

However, you don't have to just accept the rate hike. Credit card providers are required to warn you in writing 30 days before an interest increase goes into effect, giving you time to react. Here are four ways to take action. interest-rate-increase

Option 1

Your first option is to contact your credit card provider by phone or letter and politely ask that it doesn't increase your rate.

Your case will be stronger if you manage your account well by never missing repayments and not exceeding your card limit.

Consumer group Which? has produced some useful sample letters that consumers can use to challenge rate rises.

Option 2

Option 1 didn't work out? New government rules that went into effect in 2011 give consumers new rights when it comes to dealing with rate increases. Once you get the letter informing you of a rate increase, you have 60 days after the initial notification to inform your credit card company that you are rejecting the new rate. If you reject the new rate, the card provider will then block further spending on the card and allow you to pay off the remaining balance at the less expensive, pre-notification interest rate.

"If you do this, you won't be able to borrow any more money and will have to surrender your card, and must continue to make monthly repayments until the debt is cleared, but at the existing interest rate," Hagger explains.

If you go down this route, you have to stick to all the card's terms and conditions and make repayments that will ensure you pay off the card's balance in a "reasonable" amount of time -- how long this is will be determined by your card provider, based on the outstanding balance on the card. When the balance is paid off, the account will then be closed.

Option 3

Another option is to catch your credit card provider breaking the rules. Card providers are not allowed to increase rates within the first 12 months you have the card, or more frequently than once every six months.

As well as giving you 30 days' notice, the card company also has to tell you at least twice that the interest rate is changing and tell you in clear terms how much the rate change will cost you.

If you have debt problems, this can also help you escape a rate increase. Card providers can't up your rate if you have an agreed repayment plan in place for the account, or if the customer is in serious discussion with a debt advice agency and the agency has notified the credit card company.

If your card company has violated any of these rules, contact the Financial Ombudsman Service. If the ombudsman rules in your favour, your credit card provider will be ordered to put things to right -- and remedy any financial damage you incurred.

Option 4

Your final option is to cut your losses and switch your credit card provider. If you have an existing balance on the card, look out for a balance transfer deal that allows you to repay the debt at 0% for a set period of time.

In some cases, you might have enough funds to simply repay the existing balance on your card and close the account. If you then need a new low-cost card for new spending, look for a deal that offers a 0% interest introductory period on purchases.

See related: Why was my credit limit cut?, How to complain about your credit card

Published: 29 January 2013