ASK KIM


Coping With Credit-Card Rate Increases

Kimberly Lankford

You have a few options if your card issuer unexpectedly raises your rate.



Capital One recently sent me a notice saying that because of "market forces beyond their control," they are changing my credit-card rate from a fixed 9.9% to a variable rate that's currently 15.9%. What should I do with my $5,000 balance? Will closing my account hurt my credit score?

You don't have to take this lying down, but your options are limited.

You could decline the rate change and continue to pay off your balance at the old rate. In that case, you would need to call Capital One to opt out, and you wouldn't be able to make any new purchases on the card.

Capital One would then close your account and notify the three credit bureaus when you finished paying off the balance. The deadline for opting out should be specified on the notice.

Unfortunately, closing the account could hurt your credit score, especially if you've had the account for a long time and have compiled a good history. "You'd like to stick it to them and close your account, but that could result in some pretty significant damage to your credit score," says Emily Davidson of Credit.com, which offers consumers credit information and deals.

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One element of your score is based on the age of your oldest card, and another is based on the average age of all your cards. Closing out old cards can hurt both numbers.

Closing the card will also increase your "debt utilization ratio" (the amount of available credit you've used), which also can hurt your score. It's generally best to keep your utilization ratio to 20% of your available credit or less; 10% is even better.

For more information about the debt utilization ratio and other reasons why closing an account can hurt your score, see my Don't Close Credit-Card Accounts column.

Assuming you're not paying a fee on your account, your best bet may be to pay off the balance at the new rate as quickly as possible, then keep the account open but dormant. If you can't afford to pay it off quickly, keep the account open but search for a balance-transfer deal with a lower interest rate.

See our Credit and Money Management page and the credit-card page at Bankrate.com for credit-card deals.

Got a question? Ask Kim at askkim@kiplinger.com.




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