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The New Rules on Credit Card Interest Rates

Credit card interest rates (or APRs) are at an all-time high, according to data from market-research company Synovate. According to its latest survey, the average APR in the second quarter of 2010 increased to 14.7% from 13.1% a year ago.

Synovate attributed the increase to the CARD Act, legislation signed into law in 2009 that was designed, in part, to protect consumers against arbitrary interest rates. The problem, Synovate explained, was that there was a gap between when the legislation passed and when it actually went in effect, allowing banks to quickly raise rates on customers.

Fortunately, these protections are now in place, but credit card holders still need to be cautious. The CARD Act doesn’t prohibit credit card issuers from raising rates; it just makes it a little more difficult for them to do so.

"Paying off your credit card debt is the only way to be unaffected by rate increases,” Bill Hardekopf, CEO of LowCards.com and contributor to our sister site TheStreet said. He explained that this can be a problem for the uninformed consumer since “higher interest rates drain away money that could be used to pay off your debt, extending the time it takes to eliminate the balance.”

So, how exactly does the CARD Act affect your APRs? Here’s a look:

  • Issuers have to give a 45-day notice for rate increases, unless the cardholder specifically has a variable-rate card, which has terms and conditions that fluctuate with economic conditions. For example, if the Federal Reserve raises the prime interest rate, variable-rate cardholders will likely see an increase in their APR.
  • The new rate applies only to new charges the cardholder makes. If he or she carries a balance, then the old interest rate applies.
  • Issuers are prohibited from increasing a cardholder’s interest rates based on his or her payment records with unrelated accounts.
  • Issuers must perform a review every six months on accounts that receive a rate increase. This review is designed to determine if changes in a cardholder’s credit score, payment history or market conditions provide justifiable reasons to reduce the rate.
  • Issuers can't raise an account holders’ rates during their first year unless a payment is more than 60 days delinquent, provided it is not a variable-rate card. Additionally, promotional rates must be applied for at least six months.
  • Issuers can raise interest rates without 45 days notice for military personnel returning from active duty, as federal law stipulates that their interest rates be kept at 6% while they are serving. Once active duty has been completed, card issuers can restore the APR to whatever it was prior to when the cardholder began his or her service.
  • If a payment is 60 days past due, the issuer can raise the annual interest rate to its penalty rate. Penalty APRs are essentially higher interest rates that can be triggered by an infraction from a card holder. Check out this MainStreet article for more on how the CARD Act specifically affects penalty APRs.

What else should you know about credit cards? Check out this MainStreet round up of 10 common credit card myths.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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