Retroactive interest rate increase is a subsequent increase in interest on a prior purchase made on credit.
Especially in the banking field, the retroactive increase of the interest rate is a common activity.
In this sense, this concept is applicable to the action of credit cards and the effect of changes in interest rates on purchases made with them.
The most common is that a bank establishes this measure for non-payments in periods of time greater than between two and six months.
Although this will always depend on the conditions agreed between the bank and the client when contracting a specific credit card.
Operation of the retroactive increase of the interest rate
Many banking contracts or credits in the market conceive the possibility of increasing the weight of interest on the price of a previous purchase.
In other words, said contingency must be previously informed to the client in detail in the initial draft or commercial offer corresponding to the credit card to be contracted.
On the other hand, sometimes this concept is related to poorly regulated or incorrect lending practices.
For this reason, most regulations and standards pursue abusive behavior by credit institutions.
Effects of a retroactive interest rate increase
The consequences of this type of change in rates can be summarized in the following points to highlight:
- Possible generation of debt. Once a new interest rate is reversed, the outstanding payment increases. In other words, the good purchased on credit is more expensive.
- Affects the accounting balance. The customer will see their available balance affected once the increase has been made retroactively.
- Psychological aspects of the increase. Buyers often regard past purchases as valued and calculated. In other words, they do not take into account that the total amount of the good purchased may be higher than the estimate at the time of purchase.
- Consequence of defaults generated. Sometimes this type of accrued interest increases are the result of certain periods of non-payment by the debtor customer.
Although, as has been seen many times, this mechanism serves as an element to defend the interests of the creditor entity, it is common for economic institutions to monitor their actions.
To avoid increases in credit debts and facilitate the payment of consumers, each territory often establishes legislation aimed at this type of credit agreement.
The objective of this administrative surveillance is to avoid possible abusive or fraudulent conduct by banks and other usual credit institutions.