If you are an American Express customer with a low interest rate, you may soon receive a letter telling you of your new, higher rate. American Express is increasing the interest rate for more than 1 million customers, Bloombergreports. The average interest rate increase will be 2.5 percentage points, and the minimum interest rate charged will be 12.99 percent.
American Express did not seem to consider how long people were members or how responsibly they used their credit. Instead, it considered people whose interest rates were below rates charged by rival cards for borrowers with “similar credit profiles.”
The average American house has $10,000 of debt, and 2.5 percentage points could cost more than $2,000 of additional interest annually, depending upon the size of the payment and the amount that you charge each month.
Can American Express Do This?
The Credit Card Accountability Responsibility and Disclosure Act of 2009 increased consumer protection, especially as it relates to repricing. Under the CARD Act, lenders could no longer increase interest rates on existing balances. However, lenders still have the ability to increase the interest rate on future purchases, and credit cards companies use that tool to maintain the high returns of credit cards. Even paying one day late (regardless of your credit score) can result in a fee of $38 and an increase in your interest rate on future purchases to 20 percent or higher.
In addition, credit card companies are allowed to increase interest rates on go-forward purchases for almost any reason at all. However, the credit card issuer must give a 45-day written notice of a rate increase.
So, yes, credit card companies can still increase your interest rate, and all they need to do is send you a letter and give you a bit of notice. That is one of the reasons credit cards remain an incredibly expensive way to borrow.
Why Is American Express Doing This?
This rate increase is simply the result of American Express looking for ways to increase its earnings. And we shouldn’t be surprised. In just the last few weeks, American Express has lost its contract with Costco and JetBlue.
But the problems don’t stop there. The American Express business model is built upon charging merchants a higher interchange fee than either Visa or MasterCard. They justify this higher fee because American Express customers are supposedly more affluent and spend more in the stores. The higher interchange is then used to fund richer rewards, through the Membership Rewards program.
However, merchants have long complained that they are subsidizing American Express and have wanted to promote cheaper payment alternatives to consumers. If a merchant accepts American Express, they are prohibited from encouraging customers to use a cheaper payment option. But all of that changed when a U.S. District Court in February ruled that these non-discrimination rules prevent competition. Merchants can now encourage people to use cheaper payment methods.
In short, American Express is doing this because it can. And, I suspect, because it feels it must do so to make up for lost earnings.
What Can I Do?
If you pay your balance in full and on time every month, you are not paying interest, and this change does not effect you. You will continue to earn your rewards and receive the service that you are used to receiving.
If you cannot afford to pay your balance in full every month, you will end up paying interest. And interest rates on credit cards tend to be incredibly expensive. For people with credit card debt and good credit scores (above 700), you can consider a balance transfer. With a balance transfer, you move the debt from a high rate credit card company to a lower promotional rate. Some of the best offers are from credit unions, that are offering promotional rates as low as 2.99 percent for 24 months. You can find a full list of balance transfer options atMagnifyMoney. If you complete a balance transfer, just make sure you do not spend on the new credit card, and you pay on time and in full every month. Also make sure you have a plan for the end of promotional period.
If your credit score is below 700, you may want to consider a personal loan, especially from some of the new emerging lenders. You can see if you are approved with a soft pull (does not impact your credit score), and you will be given an interest rate. Compare the APR (which includes fees) to the interest rate on your American Express, and you can determine if the deal works for you. You can find a list of personal loan companies at MagnifyMoney.
Even if you are really angry with American Express, we encourage you not to close your credit card. Keeping an open credit line helps your credit score. But, if you want to stop using the credit card and do not want to pay an annual fee, you can ask American Express to convert your credit card to a no-fee option. That way you don’t hurt your credit score and you stop paying a fee.
Expect More of This
Banks and credit card companies set themselves a relatively simple goal: they want to make more money in the next three months than they did in the last three months. When they lose revenue somewhere, they look to replace it. American Express is looking for more revenue, and unfortunately they are going after some of their best customers. You would have to imagine that customers with the lowest rates have probably been with them the longest, and behaved the most responsibly. It is a shame. But, there are other options out there, and American Express may learn that short-term earnings will only harm long-term loyalty.
[source : dailyfinance.com]