Which of the Following Can Increase Your Credit Card’s APR?
Uncover the various reasons your credit card's APR can rise, so you can anticipate changes and manage your borrowing costs effectively.
Understanding your credit card’s Annual Percentage Rate (APR) is important for managing personal finances. The APR represents the yearly cost of borrowing money on your credit card, encompassing the interest rate and sometimes associated fees. This rate directly influences the amount of interest you pay if you do not clear your balance in full each month. Several factors can cause your credit card’s APR to increase, impacting the cost of carrying a balance.
Late or Missed Payments
Falling behind on credit card payments can lead to a higher interest rate, often referred to as a penalty APR. A payment is typically considered late if it is not received by the due date. Issuers can apply this higher rate if a payment is 60 or more days past due. A penalty APR may also be triggered by returned payments due to insufficient funds or exceeding your credit limit.
Issuers must provide at least 45 days’ notice before implementing a penalty APR. This penalty rate can be substantially higher than your standard APR. The increased rate can apply to both existing outstanding balances and new purchases made on the card. Issuers are required to review the penalty APR after you have made six consecutive on-time monthly payments, potentially reverting your rate to the original terms.
Declining Creditworthiness
A decline in a cardholder’s overall credit profile, as indicated by their credit score, can lead to an APR increase. Lenders regularly monitor credit reports and may perceive a cardholder as a greater lending risk if their creditworthiness diminishes. This can occur from factors beyond late payments, such as increased credit utilization. Opening multiple new credit accounts within a short timeframe can also negatively affect your credit score, as can other negative marks on a credit report like bankruptcies.
When a lender identifies a decline in creditworthiness, they may adjust your APR to compensate for the perceived increased risk. Issuers must provide at least 45 days’ notice before increasing your APR due to a decline in creditworthiness. While this change might not affect existing balances, it will apply to new purchases. If your credit score improves after an APR increase, the issuer may review your account within six months and consider lowering the rate again.
Promotional Rate Expirations
Credit cards often feature lower APRs for a limited time, known as introductory or promotional rate periods. These offers are typically provided for new purchases or balance transfers. By law, these introductory rates must last for a minimum of six months.
Once these promotional periods conclude, the APR automatically reverts to the standard variable or fixed rate specified in your cardholder agreement. Any unpaid balance remaining from the promotional period will then begin to accrue interest at this higher, standard rate. It is important for cardholders to be aware of the end dates of these promotional periods to avoid unexpected increases in interest charges.
Variable Rate Adjustments
Most credit cards operate with variable APRs, meaning their interest rates can change over time. This type of APR is linked to an underlying economic index, most frequently the U.S. Prime Rate. The U.S. Prime Rate is directly influenced by the federal funds rate, which is determined by the Federal Reserve.
When the Federal Reserve adjusts the federal funds rate, the U.S. Prime Rate moves in direct correlation. Consequently, your credit card’s variable APR will also adjust, usually becoming effective within one or two billing cycles. These adjustments are a result of broader economic conditions and are not related to an individual cardholder’s payment behavior or personal creditworthiness.