Opting outIf the opt-out involves an account closure, your credit score could suffer once the debt is paid off. The FICO scoring formula does not count the credit limits of closed accounts with zero balances when it calculates the debt-to-credit limit ratio, or utilization. You may appear more maxed out on your remaining cards after losing that available credit. Read the article "Why closing an account hurts score," to learn more on this subject.
Saving money may trump the score damage in some situations. "For those that do not plan to be in the market for a mortgage or a car loan in the next six to 12 months, they should consider opting out and keeping the lower rate if given the opportunity," says McBride.
People in the market for a mortgage should "swallow hard and take the higher rate because of the credit score," he says. "(There's) no sense paying a higher rate on a $300,000 mortgage because they didn't want to pay a higher rate on a $3,000 credit card balance."
Those who can afford a temporary dip in their score might do well to refuse the higher rate, depending on the savings and the lack of alternatives. McBride points out that a rate increase from 9 percent to 16 percent on a $3,000 balance would cost about $650 more in interest charges if the cardholder took five years to pay the balance. The cardholder could then pay down the debt to minimize the score damage.
McBride contends opting out can also make sense if you're struggling to make the minimum payment now. A missed or short payment will hammer the score a lot more than a closed account.
Keep in mind the original APR isn't guaranteed to stay in effect, even if you pay on time. You still want to pay down the debt as quickly as possible. "When you opt out, it's going to be under the existing terms, and the existing terms are going to say, 'Well, they can still raise the rate,'" says Bilker.
Bottom lineWhen you can't pay the balance in full, when balance transfers aren't an option and if you can take a score hit to save money, consider the opt-out route.
New federal regulations that take effect in July 2010 don't address opting out but they will limit retroactive rate increases. Issuers will be able to apply a rate hike going forward with 45 days' notice but won't be able to impose it on existing balances unless the cardholder pays at least 30 days late, has a variable rate or if a promotional rate has expired.