Keep the Rate or Keep the Card?

Ann has $10,000 in credit card debt.

She had been paying it off month by month -- always on time -- at an interest rate of 7.15 percent.

"Then all of a sudden, when I received my September statement the APR had jumped to 14.99 percent," Ann wrote to me.

This must be a mistake, Ann thought.

So like a conscientious consumer, she called the company that issued her credit card.

There was no mistake.

Ann joined millions of other cardholders across the country who have been notified that their interest rates are rising. They, like Ann, are being told to deal with it or get kicked to the curb.

"I called the credit card company," Ann said. "The gentleman said they had chosen several of their 'products' to raise the interest rate." Ann has two choices. She can accept the higher interest rate -- but says she "can't afford to pay double interest on a $10,000 balance."

Or she can reject the rate hike. "If I reject the terms, I would be able to pay the old rate on the existing balance," she said.

If Ann says "no deal," however, the credit card company will close her account.

Under the new Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 and Federal Reserve rules, a cardholder who is notified of a change in terms on or after Aug. 20 has the right to close the account and reject that change for the existing balance. If the consumer does so, the card issuer must allow the cardholder to repay the balance on the existing terms, make minimum monthly payments that include no more than twice the percentage of the balance included before the change in terms, or pay off the balance over at least five years.

Ann is worried about her ability to get another credit card at a decent interest rate. She's also concerned that canceling the card will lower her credit scores.

In advance of tougher credit card regulations taking effect next year, many consumers have been receiving notices of lower available balances, interest rate increases or a switch to variable rates.

What the credit card companies are doing is wearing down a lot of good customers who, if left alone with decent interest rates, would have a better chance of paying off their debts.

The Federal Reserve's rules implementing the CARD Act require that Ann be given the right to reject (or opt out of) the interest rate hike. Generally, however, the issuer is permitted to apply the new interest rate to any transactions that occur more than 14 days after notice is given.

Ann has a legitimate concern about getting another credit card with a rate as good as the one she had. With a tightening of credit standards, she may have difficulty getting another credit card at all.

She has less to be worried about concerning her credit score because she does not have any other credit cards.

"A person's FICO score is influenced by everything in the person's listed credit history, so the impact of a change to one account will be strongly influenced by the other information on her credit report," said Craig Watts, public affairs director for FICO (formerly known as Fair Isaac Corp.), the creator of the widely used credit-scoring system.

What most affects a person's score when an account is closed is the presence of outstanding balances on other open accounts -- not the closure of the account in itself. The scoring system looks at how much credit you are using compared with how much you have available.

So for example, if someone has three credit card accounts, all with zero balances, that person could close one of them with confidence that the closure won't change her FICO score, because it won't change her credit utilization rate, Watts said.

Watts also cleared up a common misconception. Closing a credit card account won't affect the duration of someone's credit history. That's because credit reports include the history of closed accounts for a number of years after closure, and FICO scores consider both open and closed accounts when calculating the person's length of credit history.

So, deal or no deal for Ann?

Ann, tell your credit issuer you won't be played. Similar to the weary, downtrodden worker in David Allan Coe's song "Take This Job and Shove It," have the nerve to walk away.

Ann shouldn't be carrying $10,000 on her credit card, but she shouldn't stand for this treatment. She should pay off this debt -- and until she does, she doesn't need another credit card.

So, Ann, don't take the banker's offer.

No deal.