Friday, February 02, 2007

How Your Credit Card Rate Can Go "Through the Roof" for No Apparent Reason

Most consumers cognize that your credit score impacts the credit card rates that you are eligible for. What you may not cognize is that if your credit score is lowered, then the interest rates on existing credit card debt could increase significantly. How? Universal Default.

It’s not a phrase that most are familiar with, and it’s certainly not one that’s used in day-to-day conversation. And although you may not even cognize what it means, it is very possible that you could learn about universal default any twenty-four hours now—the hard way.

Buried in the mulct black and white of the credit card terms and agreements, a universal default clause generally states that if you default (are late paying your bills) to the credit card issuer or any other lender the interest rate on the credit card could be raised. Banks that use the universal default clause periodically check credit reports of their cardholders. If a credit score is lowered for any reason—late payments, high debts on loans, etc.—then the universal default can be activated. Yes, even if you have got a perfect bill-paying record with the card issuer.

According to Linda Sherry of Consumer Action, more than banks than ever utilize universal default policies to increase interest rates based on their customer’s credit public presentation with other creditors. “Banks expression to be saying that if there is even a shadow of a uncertainty that a cardholder might not pay, they are going to get a insurance premium on their money while they still can.”

“We (Consumer Action) believe the existent intent of these policies is to maximise gross at the disbursal of those who are least able to afford it.”

Taking a near look

According to Linda, more than issuers than ever utilize universal default police forces to increase interest rates based on their customer’s credit public presentation with other creditors. A survey by Consumer Action illustrates a higher usage of universal default than ever before. Out of 45 banks issuing 144 credit cards, 44% of those banks utilize a universal default clause. This is up from 39% inch 2003.

“Your credit card company might utilize the fact that your mortgage payment was delayed to warrant a rate increase,” observes Sherry. “While your card company have always checked your credit on a regular basis, it’s now coming down hard when it senses a negative change in your credit.”

Sherry continues, “What is usually not mentioned, but is eye-opening indeed, is that banks are not issuing these new rates on new charges only—the full balance is subject to the higher rates.”

Gerri Detweiler, laminitis of, agrees. Universal default have go one of the leading grounds that she gets phone calls from consumers these days. “While universal default have been around for years, more than banks are using it and its usage have gained impulse over the last five years.”

“The current statute law regarding bankruptcy could significantly decline the impact of universal default for cardholders should it pass,” Detweiler continues. “Consumers desire to pay back their debts, but when their interest rate is so high, their attempts look fruitless.”

Why make banks use the universal default clause?

In its groundbreaking programme Secret History of the Credit Card, PBS’ Frontline posed this inquiry to credit card executives. According to their interviews, executive directors relayed that “the bank is not being unreasonable in raising rates when it have ground to believe that the hazard of being repaid by the client have increased.” Inch other words, they are protecting their interests by reconciliation their risk—which intends higher interest rates for “high-risk” borrowers. One distressing facet is that the regulations that determine what “high-risk” is look awfully subjective.

What looks blatantly incorrect with this scenario is the bank’s ability to change its terms on money that’s already been borrowed. For example, state you recently purchased a merchandise using your credit card at an APR of 8.9%. Respective calendar months down the route you’re informed that for whatever reason, your rate is now 27.99%. This new rate isn’t just applied to new purchases. It’s applied to the balance that you already carry on the card! Although seemingly a rear of barrel of contract, banks have got disclosed their ability/intent to raise rates under certain fortune so it’s perfectly legal.

Many card holders don’t cognize about the being of the universal default until they’re notified about a change in interest rates—or many modern times until after it’s already been changed. One victim of universal default who preferred to stay anonymous was confused when she noticed a significantly higher interest rate on one of her credit card statements. “I called the bank but I received no further information or assist beyond being informed that my rate was raised.”

Another unsuspicious consumer, Virgin Mary Ann, was surprised when she read her credit card statement 1 calendar month to happen that the APR had been raised from 8.99% to 18.49%. When she called the company, she was informed that her credit record revealed a high debt-to-income ratio, thus the bank had declared that her hazard as a borrower had risen.

“I see myself to be very capable with my finances,” states Virgin Mary Ann, “but I’ve had a few old age where I ran up more than debt than usual, including a home equity loan. I made all of my payments on time, but evidently my new debt affected what used to be a leading credit record. It’s frustrating.”

Soon after, another credit card measure arrived from Chase with a new interest rate of 27.4%--up from 8.9%. Another unpleasant surprise for Virgin Mary Ann, who said “In all the old age that I held this card, I never made a late payment.”

Universal default work stoppages again! :0(

What your options are

Since most experts agree that it’s nearly impossible to speak your manner out of a universal default once it have been activated (although it wouldn't ache to try), it’s of import to avoid having it triggered. How can you protect yourself against universal default? The two keys are to wage your measures on clip and to avoid becoming what the banks see a credit risk.

Always do your payments on time. If possible, pay measures when you have them instead of when they are due. Online measure paying is becoming an increasingly popular option for many consumers. Also see using automatic or electronic reminders to assist form your measure paying. If necessary, seek contacting your assorted card companies and inquire to have got your owed days of the calendar month changed so that they fall at a clip of the month that cooccurs with your cash flow.

Monitor your credit on a regular basis. Consumer advocators suggest that you check you credit reports at least once a twelvemonth and checking your reports twice a twelvemonth is not a bad idea. Similarly, you need to regularly check your credit score and educate yourself about the factors involved in credit scoring. Improving your credit score can assist you avoid universal default and may ensue in important interest savings, not only on your credit cards, but on other loans as well. Please visit the Credit Information subdivision of for more than inside information about credit reports and credit scoring.

Understand your card terms. First, do certain that your current credit balance is at a low rate. If your credit score is above 700, then you should be able to measure up for a good rate (a rate below 10% is considered attractive in today’s market). Now that you are aware of universal default, re-read the terms of your credit cards looking specifically for a universal default clause tucked away somewhere. Since you usually can’t talk your manner out of universal default once it’s been triggered, you should avoid holding a card that utilizes it. If you carry a balance on a card that utilizes universal default, you might see transferring that balance to one that doesn’t. Says Detweiler, “if universal default have got been activated on one card, a Domino consequence can ensue with your other cards following suit.” After that happens, you may have problem getting a low-rate balance transfer offer.

Read your mail. We’ve go so accustomed to receiving credit card offers in the mail that many modern times they head consecutive to the shredder without being read. From now on, give those envelopes a premonitory glimpse to do certain it’s not one of your issuers relaying a change in terms. According to Virgin Mary Ann, she may have got missed mail presentment from one of her banks regarding universal default for this very reason. While this would not have got got prevented universal default from being activated, she would have been prepared for it and ready to strategize an action plan.

Being aware of what triggers universal default can definitely assist forestall you from becoming another statistic. If you make go a victim, then see utilizing a non-profit credit counseling service to assist you deal with you debt situation. You can happen out more than information about such as services and other related to resources by visiting the Debt Relief subdivision of Finally, delight see posting a negative reappraisal about your card's universal default clause in our popular consumer reappraisals section. Hopefully card issuers will see changing their tactics if adequate dissatisfied consumers express their disgust. Good luck!


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