What Credit Card Companies Don’t Want You to Know

January 12th, 2010 | Posted in Credit Card Debt

Of all the games the credit card companies play that end up costing you thousands of dollars (late fees, over-limit fees, transfer fees, and so on), it’s always been the interest rate game that hurt the most — until now.

There’s a new, completely legal game they’re playing, and it can literally wipe you out financially if you’re not careful.

The Universal Default Clause

If you own a credit card, you know by now that if you’re late with a payment the credit card company will charge you a late fee in addition to raising your interest rate. But did you know that they can raise your interest rate if you’ve made a late payment on any of your other cards, including those issued by other companies?

Not only that, but your interest rates can skyrocket to 30 percent or more if you make a late payment on your car loan, mortgage, or even your phone bill!

“How can that be legal?” you may ask. The answer is found in the fine print of your credit card agreement, and it’s called a universal default clause. According to the Institute of Consumer Financial Education, currently almost 40 percent of credit card issuers apply this policy to their customers.

A Late Payment ‘Trigger’

Generally, a universal default clause states that a creditor reserves the right to penalize you with an increased interest rate if you’re late — that is, in default — of a payment to any other creditor. They justify this practice because, in theory, if you pay any of your creditors late, you pose a greater credit risk and are less likely to pay your debt.

Your creditors also have the right to routinely monitor your credit file. So a creditor with a universal default clause will be watching — and waiting.

Let’s say your Visa card has a universal default clause. Any late payment — whether it’s on your utility bill, home equity loan, or Macy’s credit card — acts as a “default trigger” allowing the bank that issued the Visa card to double or even triple your interest rate overnight. Your all-important credit score will be hurt as well.

According to a study by the nonprofit advocacy and education group Consumer Action, the top three default triggers that cause your interest rates to spike are a decline in credit score, paying your mortgage late, and paying your car loan late.

Other Triggers to Worry About

Under the universal default clause, your interest rates can be increased for several other reasons, including exceeding your credit limit, bouncing a check, having too much debt, having too much credit, getting a new credit card, applying for a car loan, and applying for a mortgage loan.

How does this affect your financial future? Take a look at the numbers. Let’s say you’re an average American household, with $8,000 of credit card debt. Assuming you make no additional purchases on your card, you have a 9 percent interest rate, and you make the minimum monthly payment, it’ll take you 218 months (18 years) to pay off your debt and you’ll end up paying $3,334 in interest.

Now let’s assume that for whatever reason you were late one month with your car payment. This late payment triggers the universal default clause with your credit card issuer, and now your penalty rate gets increased to 24 percent (the average default rate in 2005). It’ll now take you 679 months (56 years) to pay off your credit card debt, and get this — you’ll pay $30,813 in interest.

Staying Ahead of the Clause

Here are six ways to protect yourself from interest rate hike triggers:

1. Stay away from credit cards with a universal default clause.

If you’re looking to open a new credit card account, be sure to choose one without a universal default clause. This means you have to truly read the fine print. If you’re confused by the fine print (as many are), call the credit card company and ask what specific circumstances will affect your interest rate.

I read recently that Capital One cards don’t have a universal default clause (although you should double-check before applying), and Citi has dropped its universal default policy as well. In addition, sites like CardWeb.com, Bankrate.com, and LowerMyBills.com let you compare credit card offers, so visit them before you apply.

2. Know your current obligations.

Check your current statements and credit card agreements to find out your current interest rates, and to identify which cards have a universal default clause that you weren’t aware of until now. Again, if you’re uncertain after reading the fine print, call your credit card company.

Consider transferring your balance from a card that has the universal default clause to one of your cards that doesn’t. But don’t rush to cancel the card altogether, because it could have a negative effect on your credit score.

3. Run your credit report.

Not only do you need to know exactly what your current interest rates are, you also need to know exactly what’s on your credit report. Visit Freecreditreport.com or myFICO to order your credit report and credit score today.

4. Pay your bills on time.

According to the American Bankers Association, late payments for most types of consumer loans were on the rise during the third quarter of 2006. If you’re having trouble with your credit card payments, at the very least strive to make your minimum payment on time.

5. Be proactive — call your lender for relief.

If you’re struggling to make monthly payments on your other bills, like utilities, car payments, or mortgage payments, call your lender to see what options they might be able to offer you. They might be able to adjust your monthly payments so that they’re more manageable.

Your goal is to protect your credit report and credit score with a consistent record of on-time payments.

6. Fight back for your money — write your local legislator.

Right now, there are amendments to the Truth in Lending Act that, if passed, would prohibit many unfair practices within the credit card industry — including the universal default clause.

As a consumer, you can take action by letting Congress know that you want laws to protect your rights. For more information on how you can be heard, visit Consumer Action’s web site.

As I write this, Congress is holding hearings to discuss the abusive and deceptive practices of the credit card industry. Read more about it here.

A Good Night’s Sleep

Obviously, what you don’t know really can hurt you. Check today and see if you have the universal default clause on your credit cards.

If you do, be careful to stay on top of your debt. Better yet, find a credit card that doesn’t have the clause — you’ll sleep better at night.

How does Bad Credit happen?

January 12th, 2010 | Posted in Credit Card Debt

Six out of ten Americans suffer from a “bad credit rating.” Bad credit starts with imprudent choices, maxed-out credit cards, exhausted savings, overdue bills … then a letter from a collection agency.

This is followed by more letters and phone calls every day. Now each time you submit an application for credit or even a job, you will be troubled and humiliated by the specter of late payments on your credit rating.

Credit grantors tend to view any kind of collection account, whether paid or not, as negative. These negative entries can stay on your report for seven years and in the case of bankruptcy, ten years.

Here are some scenarios that can put black marks on your credit:
• You go through a divorce and your spouse maxes out your joint credit cards
• An unpaid bill from your college years comes back to haunt you
• A creditor fraudulently places a black mark on your report
• A contractor you employed places a black mark on your credit report because you refused to pay him for incomplete or substandard work
• You were late with your credit card payment.

Things happen in life: layoffs, poor health, unplanned crises that can have consequences on your credit report.

Divorce and separation can also cause bad credit. This does not mean you have to give up on dreams that you may have, such as owning a home. If the bank turns down your mortgage application, many brokers and lenders may consider you an “A” buyer.
Several companies offer mortgage loans to people with less-than-perfect credit ratings, because homes are very secure collateral. The rates and fees might be outrageous, but even people in bankruptcy and foreclosures can apply.

Automotive credit also plays a part in re-establishing your good credit standing because an automobile is an asset that can be repossessed if things go wrong.

There are two ways you can have bad credit: one is where you can’t buy anything on credit, and the other is where you have a bad credit report, but you may still be able to buy on credit. There are also varying degrees of bad credit. Much depends on what you are purchasing and who the creditor is.

If you’ve reached the end of your tether, filing bankruptcy instead of trying to pay your bills in dibs and drabs can also decrease your ability to purchase on credit.

How to Get Your Free Credit Reports

November 3rd, 2009 | Posted in Credit Card Debt, Credit Repair