November 7, 2013 | In: Financial
The Number One Reason Why the Bank Increases the Interest on Your Line of Credit
I have 2 lines of credit – one with Bank A and the other with Bank B. At one point back in 2008, both had the same interest rate of 6.5%. At that time, I wasn’t using any of them.
In 2010, I started my own business and I needed all the money I can get to fund it, so I withdrew the whole amount from both, and started with paying only the minimum payments.
At one point in 2012, I started paying more than the minimum payment on one of them, while I stuck with only paying the minimum payment on the other. A few months later, I received a letter from the bank that I was making more payments to that they are raising my interest rate (the letter said that we reviewed your account and your interest rate will be something like 10.5% – I did negotiate this to a lower amount though). The bank convinced me that the other bank will raise the interest rate as well, so it’s only a matter of time. That was in mid-2012. So I thought that in a month or so the other bank will raise it, but they did not. Fast forward to now (November of 2013), and that other bank (where I just pay the minimum payments) hasn’t raised the interest on my line of credit.
So, what do we learn from this? Well, we learn that the number one reason for a bank to increase your interest rate on your line of credit (and probably every other credit product) is if you make faster/larger payments. I can think of a couple of explanations of why the bank punishes you for this:
- The bank thinks that he’s going to lose that monthly interest that you pay every month sooner than expected.
- The bank thinks that you have more money than you initially had, and now can afford paying more interest.
So, whenever a bank raises the interest your line of credit, ask yourself: “What have I done wrong?” It might be that you just overpaid them or paid them quicker than you should! (Yes – it seems that you’re not supposed to do that.)
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