More than one million American Express credit card customers are going to see their APRs experience an increase in mid-April, according to a letter sent to affected customers (the timing may be different for you). See why the interest rate hikes are coming, what you can do about it and why it won’t matter for some cardholders.
After losing a major partnership with Costco, American Express is hitting credit card customers with some more bad news. More than one million of American Express credit card customers will have their interest rates increased by an average of 2.5 percentage points, according to Bloomberg News. I’ll expand on why they’re doing this and what you can do if you’re affected by the change.
Why your APR is going up
In mailed notices sent to American Express card customers, the company said that the APR hikes are an effort to match the APRs that you’d get from similar credit cards offered by other card issuers.
I’ve read tweets from angry American Express customers and it seems like the APR changes will apply starting on April 17, 2015. The new APR affects only new purchases and balance transfers that occur starting on that date — the new rate doesn’t apply to existing balances.
Is it legal? The legality of such APR increases are often questioned. Unfortunately, if you check your card agreement, credit card companies state that they have the right to change interest rates and other terms of the card with proper notice. When you signed the credit card application, you agreed to these conditions.
Today, if you apply for an American Express credit card, the lowest APR you can get is 12.99 percent. However, existing card customers may still have an APR lower than 12.99, even after suffering an APR increase.
Regardless of your new APR, it is higher than before and you’re not going to be happy about it. Just look at some of the tweets from affected American Express customers:
How much will this cost you? An example…
Assuming that your American Express card has a rate increase of 2.5 percentage points (let’s say 10.49% to 12.99% APR), you would have to pay an extra $2.06 in interest per $1,000 balance per month. So, if you’re currently carrying a $5,000 balance from month to month, get ready to fork over $10.30 more for interest every month.
How to avoid the higher interest rate
This is not the first time that American Express has forced widespread APR increases on its credit card customers. In late 2009, the card issuer did the same for many American Express cards.
No matter how American Express justifies the rate increase, as an affected card customer, you should be upset because it means extra money coming out of your pocket. The initial reaction would be to fight the change, but it looks like American Express won’t budge on the issue.
The only ways that you could avoid the new interest rate hike would be to:
– Close the card entirely
If you refuse to continue patronizing American Express because of the rate increase, just close your account. Your card will no longer work, but you can continue to pay off your balance under your current APR.
I must warn you first, however, that this move will cause your credit scores to drop slightly in the short-term. However, if the card is one of your oldest, it is often advised to keep the account open for as long as possible, which brings us to your other option below.
– Stop using the card, get rid of the balance
The other option would be to just stop making transactions on the card and transfer the balance to another credit card, preferably one with a lower interest rate. Of my most-recommended balance transfer credit cards, the Barclaycard® Ring MasterCard® and Chase Slate® are great for the job.
The Ring MasterCard never charges a balance transfer fee and the APR is always 8%. So, if you’re going to carry a balance from month to month, the card will ensure that you’re always paying interest at a low rate.
There are actually a few other methods to take greater advantage of the Ring MasterCard.
Chase Slate® is known for its great introductory offer that waives the initial balance transfer fee and offers a 0% APR for 15 months. If you transfer your balance to this card, you won’t pay interest so you can focus on eliminating the debt.
After getting rid of the balance, you might want to consider keeping your American Express card in the sock drawer, simply for the sake of your credit scores. I’d only do this if you don’t have to pay an annual fee. Check to see if your card has a no-annual-fee version (e.g., American Express Everyday, Blue Cash Everyday, etc.) so you can downgrade to it and keep the card account open with worrying about an annual fee.
The APR increase doesn’t affect those who don’t carry a balance
One of the biggest gripes I have with many credit card users is the habit of carrying a balance on a rewards credit card. Sure, you’ll earn rewards on your purchases, but you end up paying interest on your balance. It’s why I never recommend any type of rewards credit card to someone who carries a balance — you’re better off with a low interest credit card.
Currently, my American Express Blue Cash Everyday card has an APR of 17.24%, which is obscenely high compared to the APRs on my other cards. Yet, I don’t care because I always pay my balance in full. This means I’m not paying any interest on the card, which means the high APR doesn’t matter to me.
Even if my APR were to increase to 19.74% (as part of this wave of APR increases), it would still have no effect on me.
This approach to should apply to anyone who wants or has a rewards credit cards, especially when rewards credit cards tend to have higher APRs than cards that don’t offer rewards.