Dear Credit Smart,
If I close my credit cards with balances on them and continue paying them off does the interest rate stay fixed from the day I close them or does it fluctuate? I am current and in good standing with all. Just worried if they start raising the rates. – Diane
Dear Diane,
Unfortunately your worries are not unfounded.
The CARD Act of 2009 mostly forbids card issuers from raising interest rates on existing balances. If your card issuer decides on its own to raise rates, the law provides an opt-out mechanism: It lets you convert the debt to a five-year installment loan at the existing rate.
However, there are five exceptions to those rules and chances are you fall under the one that exempts variable rate credit cards tied to an independent index. Card issuers can pass those along to their customers. So, unless you truly have fixed rate cards, you have every right to be concerned.
I want you and my readers to know that fixed rate cards are very rare these days. Nearly all the popular cards available today carry a variable rate tied to an independent index – most commonly, the prime rate. The prime rate moves in lock step with the federal funds rate set by the Federal Reserve.
That hasn’t been much of an issue lately, but most experts believe that the Federal Reserve will raise interest rates this month and probably two more times in 2017. In fact, we could be looking at many years of rising interest rates. What that means for you and for most of my readers is that your credit card interest rates are going to be raised on your existing balances, whether your accounts are closed or not.
For you and others carrying balances, the rising rates can be a challenge. Accorting to a September 2016 study by the credit bureau TransUnion, about 9 million Americans will struggle to pay higher interest rates.
You say that your accounts are current and in good standing, which leads me to believe that you have fairly good credit. My suggestion would be for you to look for a balance transfer card with a 0 percent interest rate, with the longest interest-free period and the smallest fee you can find. In today's market, the most common balance transfer deal is 0 percent for 12 months, with a 3 percent fee. A year may not be enough time for you to pay off the cards, but it will give you some breathing room while you decide what your next step should be.
You could also explore a fixed-rated consolidation loan to pay off your credit cards. These options may be limited, depending on the total amount of debt you have. I would not suggest that you trade this unsecured debt for secured debt by using your home or other property as collateral for a loan.