The dreaded interest rate increase letter comes in the mail letting you know your rate’s going to increase in 15 days unless you opt-out of the new interest rate. Opting-out lets you decline the new rate and pay off your balance at the lower interest rate. There’s a catch though, 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.
Sure, paying off your credit card at the lower interest rate is ideal, but having your credit card closed might not be good for your credit score. Think twice about opting-out in these situations:
1. You pay the credit card balance every month.Sure, you’d think your credit card issuer would treat a loyal customer better, but things don’t always go the right way. If you never carry a balance, a higher interest rate doesn't affect you one way or the other. Opting-out, more often that not, leads to your credit card being closed. And we know that closed credit cards never help your credit score and can usually hurt it.
2. You don’t have any other credit cards or loans.Right now, this credit 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.
3. Your other credit cards are maxed out.Level of debt is 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 opt-out, pay off the other credit card balances to protect your credit score.
Should You Opt-Out?
While you may be furious about your increased interest rate, especially if you’ve kept a positive payment history and have a good credit score, the fact is 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. So, before you opt-out, weigh your options. It may be smarter to bite the bullet and pay the balance off at the higher interest rate.