If you have a credit card, you might be familiar with the term APR. APR stands for Annual Percentage Rate, and it’s the interest rate that credit card companies charge on unpaid balances. While many people understand that credit card companies charge interest, not everyone knows that the APR can change over time. In this blog, we’ll explain when and why a credit card company can adjust your APR, and what you can do to manage it.
What Is APR?
The APR is the interest rate that your credit card company charges you for carrying a balance on your card. It’s expressed as a yearly percentage, but it’s applied to your balance each month. If you pay off your balance in full each month, you can avoid paying interest. However, if you don’t pay the full balance, the APR comes into play, and you’ll owe interest on the remaining amount.
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There are two types of APRs:
- Fixed APR: This type of APR stays the same and doesn’t change unless your credit card company notifies you in advance.
- Variable APR: This type of APR can change based on factors like the prime rate or other interest rate benchmarks.
When Can a Credit Card Company Adjust Your APR?
Credit card companies have the ability to adjust your APR under certain conditions. Understanding these conditions can help you avoid unexpected interest rate increases. Here are some common reasons when they might change your APR:
- Changes in the Prime Rate
Most credit cards have a variable APR, which means that the interest rate is tied to a benchmark rate, usually the prime rate. The prime rate is the interest rate that banks use when lending money to their most creditworthy customers. When the prime rate goes up or down, your credit card’s APR may also change.
For example, if the prime rate increases by 1%, your variable APR may increase by 1% as well. This means you’ll pay more interest on any unpaid balances.
- Missed or Late Payments
If you miss a payment or pay your credit card bill late, the company can raise your APR. This is known as a penalty APR. Penalty APRs are usually much higher than regular APRs and can make it more expensive to carry a balance on your card.
Credit card companies are required to notify you before applying a penalty APR. In most cases, they’ll give you a warning after your first missed payment. However, if you continue to miss payments, the penalty APR will be applied, and it can remain in place for six months or longer.
- Promotional Rates Expire
Many credit cards offer introductory or promotional APRs to attract new customers. These rates are often much lower than the standard APR, sometimes as low as 0%. However, these promotional rates don’t last forever. They typically expire after six months or a year.
Once the promotional period ends, the APR will adjust to the card’s regular rate. If you have a balance remaining when the promotional rate expires, you’ll start paying interest at the new, higher APR.
- Changes in Your Creditworthiness
Credit card companies periodically review your credit report and credit score. If your credit score drops due to things like missed payments on other accounts or increased debt, they may decide to increase your APR. This is because a lower credit score makes you a higher risk to lenders.
On the other hand, if your credit score improves, you might be able to negotiate a lower APR with your credit card company.
- Market Conditions or Economic Changes
Sometimes, credit card companies adjust APRs in response to changes in the economy or their own business conditions. For example, if the economy is experiencing inflation or rising interest rates, credit card companies may raise APRs to cover their costs.
In this case, the card issuer must notify you of the change at least 45 days in advance. You have the option to cancel your card if you don’t agree with the new rate, but you’ll still be responsible for paying off any remaining balance at the old APR.
- Cardholder Agreement Changes
Credit card companies can make changes to your cardholder agreement, which may include adjustments to the APR. These changes are often due to company policies or shifts in market conditions.
If your credit card company plans to adjust your APR due to changes in the cardholder agreement, they are required by law to notify you at least 45 days before the new APR takes effect. This gives you time to decide whether you want to continue using the card or close the account.
What You Can Do to Manage Your APR
While credit card companies have the right to adjust your APR, there are steps you can take to manage it and avoid sudden increases:
- Pay on Time: Avoid late payments, as they can lead to penalty APRs. Paying your bill on time every month is the best way to keep your APR low.
- Pay Off Your Balance: If possible, try to pay off your balance in full each month. This way, the APR won’t matter, because you won’t be paying any interest.
- Monitor Your Credit Score: Keep an eye on your credit report and score. If your score drops, your APR might increase. On the other hand, improving your credit score could help you qualify for a lower APR.
- Look for Lower APR Cards: If your current card has a high APR, consider looking for a credit card with a lower rate. You can also transfer your balance to a card with a 0% APR introductory offer to save on interest.
- Negotiate with Your Credit Card Company: If you’ve been a responsible cardholder with a good payment history, you can try negotiating a lower APR with your credit card company. Sometimes, they’ll agree to lower your rate to keep you as a customer.
FAQs: Explain When this Credit Card Company can Adjust the APR
Q. Can my credit card company raise my APR without telling me?
A. No, credit card companies are required to notify you at least 45 days before any changes to your APR take effect.
Q. What is a penalty APR?
A. A penalty APR is a higher interest rate applied to your account if you miss a payment or make a late payment.
Q. Can I avoid paying interest if my APR increases?
A. Yes, if you pay off your balance in full each month, you can avoid paying interest, even if your APR increases.
Conclusion: Explain When this Credit Card Company can Adjust the APR
Credit card companies can adjust your APR for several reasons, including changes in the prime rate, late payments, and your creditworthiness. While these changes can happen, understanding the conditions that lead to APR adjustments can help you manage your account better. By paying on time, keeping an eye on your credit score, and paying off your balance, you can reduce the impact of APR changes and keep your credit card costs low.
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