| Credit Card Interest Rate OptOut |
| By Credit Federal |
Published
11/28/2008
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Credit Card
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Should You OptOut if Your Credit Card Interest Rate Increases?
If you received a letter from your credit card company that your card interest rate will increase in 15 days unless you optout, what happens if you do? Opting-out lets you decline the new higher rate and pay off your balance at the current lower interest rate but there's a catch. Many credit card issuers will close your credit card if you don't accept the new rate. Some close it immediately. Some wait until you've paid off the balance. Others just let the credit card expire.
Although opting-out lets you pay off the balance at the previous lower interest rate, it might not be the smartest choice since your credit card will ultimately be closed.
Paying off credit cards at the lower interest rate seems like the wisest choice on the surface, but having your credit card closed might not be good for your credit score. Think twice about opting-out in these situations:
- The credit card is your oldest credit card account. If it's your oldest credit card, consider accepting the new interest rate because the age of your credit is 15% of your credit score. If you let that credit card close, your credit age will shorten and your credit score could drop.
- You don't have any other credit cards or loans. In this situation, your credit card account is the sole contributor to your credit score. Not only will closing the account decrease your credit age, your credit score won't improve because you don't have anything being reported. Payment history is 35% of your credit history and you need years of timely payments to get the best credit score.
- Your other credit cards are maxed out. Level of debt counts for 30% of your credit score and is measured by your credit utilization (balances divided by credit limits). The higher your utilization the lower your score. If your credit card gets closed while your other credit cards have high balances (relative to their credit limits), your credit utilization could go up, causing your credit score to drop. If you're going to optout, payoff the other credit card balances to protect your credit score.
Understandably you'll be upset about your increased interest rate, especially if you've been a long term customer with a positive payment history and have a good credit score. But the facts are that opting-out of the higher interest rate could hurt your credit score. A lower credit score could have a ripple effect causing your other interest rates to go up as well. Hence it may be smarter to accept the higher rate.
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