What Credit Card Companies Don't Want You to Know

[Ban Hammer 14,283]

Posted on Monday, March 12, 2007, 12:00AM

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.

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[almaty 19]

good info. indeed

[Cali Gal CPA 0]

I know Chase has that Universal Default Clause. A neighbor of mine defaulted on his car payment and was surprised that Chase raised his interest to more than 20%. The reason? His car loan.

[brnidokiegurl 1]

I knew it was a possibility, and i have been late on a few in the last year (just flat forgot the last one) not intentionally i assure you, so far they havent raised anything. My goal is to find some way to get out from under these things soon.

[Mr. Big Dog 10,747]

I had an old BofA credit card once. Out of nowhere - and I mean nowhere since I do not have nor did ever have any late payment on anything at all and no debt other than a mortgage - they raised my interest rate from 7.99 to 12.99. I just called and had them close that account. It's one way for a company to lose a customer for life.

[AnaAndDaniel 0]

yup, nasty situation all right. if you are using credit from credit cards, make damn sure you make at least the minimum payment.

(yeah yeah, better pay it off every month. even better never use it. but different situations for everyone)

Daniel

:energetic:

[sunandmoon 450]

one thing you can due is set up autopay for the minimum due on your accounts. that way if you should forget, will not trigger the universal default.

[Marc and Olga 0]

yup, nasty situation all right. if you are using credit from credit cards, make damn sure you make at least the minimum payment.

(yeah yeah, better pay it off every month. even better never use it. but different situations for everyone)

Daniel

:energetic:

Actually you are better off using a small amount and paying it off as it shows up positively! If you do not use it, this could be bad for your credit...remember the TOO MUCH credit in the story?

I use my only credit card to pay for my vonage telephone and a few other monthly charges and usually pay it off every month...a minimum of $100 which means it will only be 1 or 2 months if I NEED to pay it off completely!

My suggestion is always pay more then the minimum...with my car payments ($196 each month) I send at LEAST $200, usually (until recently) $250, I owe $500 on it and it is not suppose to be paid off until September, though it will probably be paid off in April or May!

[Hilarious Clinton 452]

My suggestion is always pay more then the minimum...with my car payments ($196 each month) I send at LEAST $200, usually (until recently) $250, I owe $500 on it and it is not suppose to be paid off until September, though it will probably be paid off in April or May!

Feels good doesn't it?

[Jasman0717 9]

Outstanding information, thanks for sharing