A growing number of readers' e-mails to Bankrate are asking the same question lately: Should I opt out of this rate hike? Credit cardholders given the chance to avoid an imminent rate increase face a number of options, each with pros and cons.
No federal law or regulation requires issuers to offer cardholders a chance to reject a rate re-pricing, or opt out, according to Chi Chi Wu, a staff attorney for the National Consumer Law Center in Boston. Issuers may still present an opt-out in the name of goodwill or to comply with state law. Usually, but not always, opting out involves closing the account. The cardholder can't use the card going forward but gets to pay it off at the old rate and under the existing terms.
Like most answers to credit card questions, the best course of action depends on your situation. Let's explore some scenarios.
Paying off the debt
If you can wipe out the outstanding debt before the rate increase applies, this is the best move for your wallet and credit score. You will pay no additional interest charges and your score won't suffer from an account closure. To keep the card active after the higher rate takes effect, use the card once a quarter to purchase something inexpensive and pay the balance off.
If the amount is too large to pay off and the rate increase is worthy of avoidance, see if you can do a balance transfer to another card. This leaves the original account open and paid off, which will help your credit score as you attack the balance on the new card. Scott Bilker, creator of DebtSmart.com, says he'd first look to his existing cards for balance transfer deals, then consider new cards if his didn't offer any good rates.
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It may prove tough for some to qualify for a better interest rate. For rates below 8 percent, you need a stellar credit score. "I'd say north of 720," says Curtis Arnold, founder of CardRatings.com and author of "How You Can Profit from Credit Cards."
There's also usually a cost involved with balance transfers. Balance transfer fees are typically 3 percent of the balance, but increasingly issuers are charging 5 percent of the balance with no cap on the fee, says Greg McBride, senior financial analyst at Bankrate.com.
Use this work sheet to plug in the costs. Note the teaser balance transfer rate and the regular annual percentage rate, or APR, following its expiration.
If the math plays out in favor of a balance transfer, make sure not to charge new purchases until that balance transfer debt is paid off. Issuers will usually apply payments to lower-rate balances first to maximize profit.