If interest rates are going down, why are credit card rates going up? Consumers around the country are undoubtedly asking that question after receiving notices from many major issuers with some very bad news: their credit card rates are about to rise -- in some cases more than tripling.
But consumers don’t have to put up with it. Kevin McPhail of Austin got his Texas-sized rate increase lowered recently by calling to complain -- but only through old-fashioned persistence. His story, experts say, highlights an important lesson for credit card users: If at first you don't succeed, try, try to lower your rate again.
McPhail, 43, called Citibank to complain as soon as he received a notice last month that his interest rate would climb to 15 percent. He was told the rate was the lowest available.
"Three times (the bank representative) told me there was not a lower rate," he said.
Undeterred, McPhail at last said the magic words that got Citibank's attention.
"I asked her to close the account," he said. Immediately, McPhail was transferred to an “account specialist” who was able to knock 5 percent off his rate. He even got a temporary discounted rate of 1.9 percent for the next six months.
A critical element to McPhail's success was this: When he called, he was holding an ad for a competitor's card. While he negotiated with the credit specialist, he read off the competitor's terms, giving him great bargaining power.
McPhail had a happy ending, but it left him with a bad taste in his mouth.
"I don't think I should have to threaten quitting to get their best rate," he said. “I felt like there was some level of dishonesty at the first (customer service) tier. I wonder how many people just walk away at that point."
Citibank, in a statement, said that the initial representative who talked to McPhail, “may have not followed our standard protocol."
Wave of rate hike letters
But financial experts say it's common for consumers to hear a quick "no," when they call their credit card companies.
And persistence is more important than ever, said personal finance writer Liz Weston, because many card issuers have recently imposed blanket interest rate hikes on consumers -- even those with good credit.
"The stories are fairly consistent. People who haven't paid late, with good credit scores, who haven't done anything that would typically trigger a rate increase are getting these letters," said Weston, author of “Easy Money: How to Simplify Your Finances and Get What You Want Out of Life.” She said one consumer she spoke to recently was hit with an increase from 7 percent to 24 percent.
Credit card rates are running in the opposite direction from interest rates set by the Federal Reserve because banks are struggling to shore up balance sheets in the wake of other financial troubles, such as the mortgage meltdown, Weston said. Still, the sweeping nature of the interest rate hike notices is a new twist.
“This is difference from business as usual,” she said.
Must be in writing
One version of these "Dear Customer" letters, sent by Bank of America in January, tolds consumers they must provide the bank with written notice that they reject the rate increase by Feb. 19, and must stop using the card by that date.
“If your account is used at any time after this date, the above changes will apply to your account even if you sent us timely notice rejecting the change,” the letter reads.
Remember, the new higher rate applies to the entire outstanding balance even if most of the purchases were made -- and the money borrowed -- while the rate was lower.
Bill Hardekopf, who runs the credit card information Web site LowCards.com, said it's important for consumers to check their bills carefully to look for surprise interest rate hikes.
"Don't assume your rate is decreasing," because the Federal Reserve lowers interest rates, as many cardholder agreements give the banks broad license to raise rates "at any time for any reason," he said.
While some card rates are tied to the “prime” interest rate -- which does move in lock-step with the Fed, 3 percentage points higher than the Fed funds rate -- many card issuers are raising the “spread” above the prime rate to compensate. In McPhail’s case, that meant an increase from prime plus 3.9 percent to prime plus 8.9 percent.
Get a better deal
The good news, Hardekopf said, is that customers with good credit can almost always get a better deal by speaking up.
"The strongest recommendation we have for people who experience an increase is, if you feel your rate is too high, call your credit card company and ask them to lower your rate," he said.
It may seem simplistic, but it really does work because the credit card industry is very competitive, he said."If you are a good customer, they don't want to lose you."
Hardekopf said any consumer with good credit shouldn't be paying more than 12 percent on credit cards. If you're paying more, you should get on the phone right now, he said.
Weston said consumers should be able to find a card with a rate at about 10 percent -- or get their existing bank to match a competitor's 10 percent rate.
But card rate bargain hunters have got to be ready to listen to a few “no's” first. They also need to be ready to threaten to close their accounts.
"The people who answer the phone, they are being paid to get people off the phone as fast as possible. They might not know about all the options you have," Weston said. "That's why you must go through that dance of saying you are going to close the account, and then you get someone who can help you."
McPhail didn't like that dance, and he told Citibank so in a stern letter dated Feb. 14.
"Why is it your company’s practice to literally lie to your customers about what rates are available to them?" he wrote. "Why should a customer have to threaten to close their account to get a better rate, which they are actually qualified to receive?"
The form letter response he received offered no explanation, stating simply, "We regret any inconvenience or difficulty you may have experienced."
For most people, saving 5 percent on credit card interest is worth a lot of inconvenience.