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:

  1. The bank thinks that he’s going to lose that monthly interest that you pay every month sooner than expected.
  2. 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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