The Reason Behind Capital One's Rate Increase

The credit card company, along with its peers, is trying to save its own bottom line.

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Today's guest post comes from Bill Hardekopf, chief executive of the credit card comparison website LowCards.com:

Last month, Capital One raised some eyebrows by significantly increasing their rates on new customers on the majority of their credit cards. The advertised annual percentage rate on these 15 cards increased from an average of 12.45 percent to 17.24 percent. One could ask, "What's left in your wallet?"

But Capital One is not alone. Many issuers are increasing the rates to new customers on selected cards.

Since credit card loans are unsecured, issuers have been burned during these tough economic times. Bankruptcies, defaults and delinquencies are taking a toll on their bottom line, and we must remember that issuers are in the business to make money.

In this new economic climate, issuers are trying to minimize their risk of unpaid loans as much as possible and consumers are paying the price. Issuers seem to be minimizing this risk in two ways.

The first way is by reducing their exposure to high-risk customers. If you want to obtain a new credit card but you have average or poor credit, you will have a hard time finding a card. If you already have a card but are classified as a high risk customer, you could also see significant changes. Chase recently added a $10 monthly fee and increased the minimum payment from 2 percent to 5 percent for their cardholders who carry a large balance. Last month, American Express offered $300 to some of their high-risk customers if they closed their accounts and paid off the balance by April 30.

Secondly, issuers are quicker to the trigger at raising your interest rates or lowering your credit limits. If you do anything to show the issuer that you are even a slightly greater credit risk, you will likely see your APR or credit limit changed. Negative signals include missing a payment, being late on a payment, exceeding your credit limit or even using too much of your credit limit.

What can consumers do to protect themselves? 

  • Increase or at least maintain your credit score. Don't let your score decline.
    • Pay all your bills on time. Don't be late on any bill. Set up e-mail reminders on all your bills whenever possible.
      • Do not exceed your credit limit. In fact, try to use less than 30 percent of your card's credit limit.
        • Pay more than the minimum payment. This also helps to pay off the balance faster.
          • If you see your APR increased, politely call your issuer and request a lower rate. Be persistent. There are other offers out there and switching to a card with a lower APR might be in your best interest if your rate is not lowered. Make sure to thoroughly read the Terms and Conditions of any credit card you may be considering so you know what to expect from the issuer. LowCards.com is a great place to compare 1000+ credit cards.
            • If you are carrying a balance on your card, pay cash. You will avoid increasing that balance which is very costly. In addition, studies show that you'll spend 12 percent to 18 percent less when paying cash than using a credit card.
              • The tight credit market will continue for some time. Do all you can to protect your credit score.