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Q: I’m really confused about when and why credit card companies can raise my APR. Cards always offer really low APRs at first, and then it seems like they raise out of nowhere! Why does this happen?
A: This depends on a number of things. One of them is whether or not your current APR (annual percentage rate) is part of an introductory offer. If this is the case, your APR will not go up until that introductory time period has elapsed (usually six months to a year.)
Once an introductory period has expired, the card company can then raise your rate to whatever its current rate is. How much your APR will be raised depends on your current credit rating, your debt-to-income ratio, and your card history during the introductory period (how much you spent, how well you made your payments, and other things.)
At any time after that, if you fall behind on payments or if anything negatively affects your current credit score, the card company can choose to raise your APR. This can occur right after the APR was raised as a result of an introductory time period expiring.
The card company can also raise the APR on their any time that the prime rate is raised. If you’re like a lot of people, you may hear about the prime rate quite a bit. You may not know exactly what the words mean, however.
A simple explanation is that the prime rate is usually around 300 percentage points above the federal funds rate, which is what banks charge each other for money lent back and forth between them overnight. This lending has to be done in order to fulfill funding requirements that have been set by the Federal Reserve.
So, if the prime rate is raised, a card company may decide to raise its interest rates. This usually will not affect customers who already have a card, and/or who have not done anything to warrant their APR being raised (see preceding paragraph.) It may, however, affect new card members, if they apply after the new APR has gone into effect, as that is the one they will have to pay.