The Truth in Lending Act is the Federal law that says (among other things) when banks are allowed to increase credit card interest rates. Currently, banks have a relative amount of freedom in raising interest rates, but newly signed amendments to the law will restrict the times when your interest rates can increase.
Four Times Banks Can Increase Interest Rates
Your credit card interest rate can increase when you've defaulted on the credit card terms i.e. you were late on a payment, went over the credit limit, or bounced the check for your payment. Until February 22, 2010, your increase rate might even increase if you've been late on a payment to another creditor - a practice known as "universal default".
Banks can increase your credit card interest rate any time if you have a variable rate that is tied to an index like the prime rate. When the index rate increases, your variable rate will also increase.
When a promotional rate expires, your credit card interest rate will likely increase. New credit card rules going into effect February 22, 2010 require promotional rates to last at least six months. If you sign up for a credit card with a promotional rate, make sure you understand what the new rate will be once the promotion ends.
An increase in credit card interest rates is allowed when you've just completed a debt management plan or other hardship arrangement or you’ve defaulted on an existing arrangement.
Will Banks Lower an Increased Interest Rate?
Currently, an increased interest rate will only be lowered at the credit card company's discretion. Unfortunately, many cardholders have been stuck with a higher interest rate for the life of their balances. After February 22, 2010, creditors are required to review previous credit card interest rate increases to see if circumstances have changed and lower your interest rate accordingly.
Additionally, after February 22, 2010, creditors will no longer be allowed to increase interest rates within the first year of an account's opening, unless you’ve defaulted on the account, you have a variable interest rate, your hardship arrangement has ended, or the promotional rate has ended.
Advanced Notice of Interest Rate Increases
Credit card issuers currently must give a 15-day advance notice before increasing your interest rate. After August 20, 2009, they are required to give you a 45-day advance notice before increasing your interest rate.
After February 22, 2010, interest rate increases cannot apply to existing balances. The new rate will only apply to charges made after the rate increase becomes effective.
