Earlier notice on rate hikes gives credit card users options

Here's another good reason to pay attention to mail from your credit card company: You could soon receive a notice that the interest rate on your credit card is going up. That's the bad news. The good news? Well, there isn't much, but how about this: You may actually have time to figure out what to do about it.

Within the next few weeks, credit card issuers will be required to give borrowers at least 45 days' notice before making a significant change in their interest rates or fees. The heads-up requirement is included in a credit card reform bill President Obama signed in May. Most provisions in the Credit Card Accountability, Responsibility and Disclosure Act don't take effect until next year, but the advance-notice requirement kicks in on Aug. 20. Previously, credit card issuers could raise rates with just 15 days' notice.

There are some exceptions to this requirement. If your card's interest rate is tied to the prime rate or similar benchmark and that benchmark changes, your issuer doesn't have to give you advance notice, says Ben Woolsey, director of marketing and consumer research for CreditCards.com. However, Woolsey says, issuers will be required to give you 45 days' notice if they increase the margin, which is the amount added to the benchmark index to calculate your annual percentage rate.

In the past, consumers have complained that by the time they learned about a rate increase, they didn't have time to do anything about it, says Gerri Detweiler, credit adviser for Credit.com. "This will give consumers a little longer to sort out their options if they get a notice of a change in terms," she says.

Your best bet, of course, is to pay off your balance before the rate increase. If that's not possible, you have two choices:

•Repay your balance at the higher interest rate. If you have a small balance and the rate increase is modest, this may not cost you much. And if you have other credit cards with lower rates, you can use them for future purchases.

Many borrowers, though, aren't dealing with modest increases. While the law requires issuers to notify borrowers of a rate increase, it doesn't cap the amount. And in advance of more stringent rules that will take effect next year, many credit card issuers are imposing significant increases in borrowers' rates.

•Opt out of the rate increase. The law requires issuers to give borrowers the option of paying off their existing balance at the old rate. Typically, once the balance is paid off, your credit card issuer will close your account, says Curtis Arnold, founder of CardRatings.com.

Since you're probably already ticked off at your credit card issuer for jacking up your rate, opting out and parting ways may seem like a sensible and satisfying choice. But before you head down this path, it's important to understand how it could affect your credit score, Arnold says.

One of the factors used to calculate your credit score is what's known as the "credit utilization ratio," which is based on the amount of credit you have outstanding as a percentage of your total available credit. For example, if you have $10,000 in available credit and owe $2,000, your credit utilization ratio is 20%. Keeping your utilization rate low helps your score.

When you close a credit card account — or your issuer closes it for you — the amount of your total available credit shrinks, which could lead to a higher utilization rate, says Craig Watts, spokesman for Fair Isaac, developer of the widely used FICO score.

Watts adds, however, that the impact of closing an account varies, depending on the individual. If you have low balances on your other cards, closing one account isn't going to shift your utilization rate enough to affect your score, he says. If you have a lot of outstanding debt, though, closing one account could change your utilization ratio enough to lower your credit score, he says.

Before deciding whether to opt out or stay in, get out a calculator and figure out how much the new interest rate will affect your monthly payments. If you're trying to make ends meet and face a big increase in your monthly payments, you should seriously consider opting out, says Bill Hardekopf, chief executive of LowCards.com.

Once you've paid off your balance, you can focus on rebuilding your credit score, Watts says. If you're having trouble making your monthly payments, "deal with that situation first," he says. "You can always improve your credit score over time after you take care of current priorities."