Posted by: kvan in interest, increase, debt reduction, debt, citi on Jan 28, 2009
Over on the SavingAdvice forum, a user relayed his experience with a Citi credit card as they move to increase his interest rate. He currently has a balance transfer rate of 5.9%, plus an ongoing purchase rate at 5.9%, both of which expire in about 2 years. These are good rates. Too good, apparently. Citi sent him a letter, noting that with the hard economic times, it has become necessary to raise his rate to 14.9%. As with all of these offers, Citi allows him to reject the rate increase by closing the account. In that event, he continues paying the debt under the current 5.9% terms, but can no longer use the card. As this person investigated options by talking to Citi directly, he found that even if he decides to close the account, Citi will later offer to "re-open" the account as he approaches the 2 year point. So, as long as this user isn't relying on the card for ongoing purchases, it makes perfect sense to opt out of the increase, close the account, and continue paying the debt down at the attractive 5.9% interest rate.
What I take from this is that we're seeing a new breed of credit card company manipulation. We all know those 0% rates are subsidized by the masses of people who blow the deal sooner or later with a missed payment, or by carrying the balance into a long term high interest rate. Now, I'm certain the issuers have calculated that 95% or more of people will choose not to close the account, and accept the higher interest rate. It's the easy thing to do, and most people rationalize that they just won't use the card much anymore, though it is nice to keep the account open to have that option. With today's historic low interest rates, its obvious credit card companies have found another way to exploit consumer emotions to massively increase their revenue.
But I wonder, what would happen if the ratios were reversed, and 95% of people decided to opt out and close the account? Can you imagine the extreme panic when a credit card company realizes that 95% of the customer base is walking out the door? And the remaining 5% are high risk customers that can't get a card anywhere else?
So, a call to action: We as consumers should opt out of every rate increase that comes our way. If enough of us do this, credit card companies would have to change their policies in order to stay in business. I, for one, will opt out of the rate increases I've received for my WaMu and USAA cards.
There is an additional benefit to opting out. Debt management experts like Dave Ramsey and John Commutta recommend cutting up your credit cards. Opting out of a rate increase leads to closing an account, which is the equivalent of cutting up the card. This is a strong show of commitment to stop living on borrowed money. It's a great launching point for a debt reduction program. After you opt out, commit yourself to continue the momentum by paying more than the minimum required each and every month until you are out of debt. Strive to use 10% of your monthly take home for debt reduction. Most people will get out of debt in 2-3 years.
I will present a caution to those of you who might need credit for emergency purposes. The unfortunate reality is that the worst time to seek credit is when you really, really need credit. Make sure you are on firm financial footing, and have an emergency fund, or at least other avenues of credit, even other credit cards as a backup plan. I, for one, have a half dozen other cards and a home equity line of credit I can fall back on, as well as a small emergency fund. Also, for those closely tracking your FICO score, you may have seen that closing an account can lower your score. This is true, but the affect will vary depending on your situation. The variables to consider are your debt utilization, and your length of credit history in the eyes of creditors. Your debt utilization will go up, because you have less credit available. This will bring your FICO down a bit. Length of credit history will suffer only a small change. If you've had the account for 10 years, it continues to count as a "10 year account", until it falls off the report after 7-10 years. Overall, you likely will be paying a few points on your FICO score for the right to opt out of the rate increase.
In the end, I am recommending a mass movement to opt out of rate increases. The ideal outcome in my mind is that you will ultimately have the same open credit lines at the same rate terms you have today. As in the case of the SavingAdvice user mentioned earlier, you can make a stand against a rate increase now, knowing there's a good chance the credit card company will return later, hat in hand, asking for your continued business.