Christmas is over and many of you have most likely spent a bit more than you planned on those gifts.
Much of that spending was done on credit cards, cards with the “promise” of zero interest for so many months, or a low interest rate as long as you make your payments on time. But is it really that cut and dry? No is is not.
Credit card companies play games with you, well, they actually just play dirty. They have tiny small print in this great interest rate promotions that end up costing you thousands of dollars (late fees, over-limit fees, transfer fees, and so on), after all, we all know it is the interest rate that costs you the most….right? Well, the tricks are worse that you may know.
There is a completely legal game credit cards companies are playing, and it could wipe you out financially if you’re not careful.
It’s called “The Default Clause”
If you have a credit card, you know that if you are late with a payment on that specific card, the credit card company will charge you a late fee in addition to raising your interest rate. Now here is the catch, did you know that they can raise your interest rate if you’ve made a late payment on any of your other cards, regardless of what company issued the card?
It gets worse, your interest rates can jump to 25 percent or possibly more if you make a late payment on your car loan, mortgage, or even your phone bill!
“This can’t be legal” you say, Sadly it is. It is in the tiny find print of your credit card agreement, called universal default clause, that you agreed to as soon as you used the credit card. There is not a lot of credit card issuers with this policy but it pays to be aware
Late Payment “Gotchya”
A universal default clause generally states that a creditor reserves the right to penalize you with an increased interest rate if you’re late (in default) of your re-payment terms — of a payment to any other creditor not just that of the issuing company. They justify this because, in theory, if are late with one creditor, you are a greater credit risk and are more likely to pay other debts, including the issuing card late.
Creditors also have the right to routinely monitor your credit file. So a creditor with a universal default clause will be watching, waiting, time is on their side. Remember, credit card companies are not your friend, there are in business to make money….Your money!
So assume your Visa card has a universal default clause. Any late payment — your make, whether it’s your utility bill, home equity loan, or gas credit card — acts as a “default gotchya” allowing the bank that issued the Visa card to double or even triple your interest rate overnight without warning.
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.
There are other “gotchya’s” to Worry About
Under the universal default clause, your interest rates can be increased for many 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. Once you signed up for a credit card with a universal default clause, you gave the credit card company an unfair advantage over you, and your money.
This effects your financial future in a bad way. Let’s look at this example. 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 will take you 218 months (18 years) to pay off your debt and you’ll end up paying $3,334 in interest. Who wins here? (credit card company…you loose)
Now let’s assume that for whatever reason you were late one month with your car payment. They gotchya, the late payment triggers the universal default clause with your credit card issuer, and now your penalty rate gets increased to 26 percent. It will now take you 679 months (56 years) to pay off your credit card debt, and get this — you’ll pay $30,813 in interest. Can you see this is a no win situation for you and a win win for the credit card company?
Imagine if you had three other cards with a universal default clause..interest rates go up on all of them due to one late payment on your car.
Beat the Clause
Well if you have been reading my blog for any period of time you know what I am going to say about beating the universal default clause….”Don’t use credit cards!”
However, I know most of you out there already have credit cards, and many have the clause so here is some ideas to protect yourself from the “gotchya” of interest rate increases.
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 most of us are, they write it that way to confuse you on purpose, call the credit card company and ask what specific circumstances will affect your interest rate.
Sites like Bankrate.com let you compare credit card offers, so visit them before you apply. But keep in mind, this is a fluid market and changes are made fast. Even if you have a card without a universal default clause, that doesn’t mean that they can’t or won’t change the agreement terms. Read those little bill inserts, or specific letters from your issuing companies, they are sending them out for a reason…something changes and it won’t be to your benefit.
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 cancel the card to quickly, 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 AnnualCreditReport.com to order your credit report and credit score today. You should make a practice of this every quarter with a different reporting bureau, this way you can make sure what is being reported is accurate.
4. Common sense, Pay your bills on time.
If you can’t pay ontime, chances are you are over extended and are not properly managing your money. Read Dave Ramsey’s Total Money Makeover.
5. Be proactive — call your lender for relief.
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.
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 credit card agreements. Better yet, make a plan to become debt free and pay cash. — you’ll sleep better at night.
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