Credit Card Trivia - Don't Be Late

(originally posted somewhere else in 2006 sometime)

Just a short post about one of my most hated lending industry practices, because it can cost you hundreds or possibly thousands of dollars.

Many - most, really - credit card companies now have something called a "universal default" clause written into your agreement. A universal default clause allows credit card companies to raise your rates for a number of reason (hence the "universal") but the one that is most likely to bite you on the butt is paying late.

If you pay late on ANYTHING - that particular card, your mortgage, your car payment, your phone bill - then the lending company can raise your rates. You could easily go from a reasonable rate of, say, 10% (I think that's high personally but I'd bet it's pretty average) to rates in the upper 20% range. On a $5000 balance and assuming that you want to pay it off in 24 months, a change in rates from 10% to 29% would change your payment from around $230/month (well over what your minimum payment would be in the first place - they don't want you to pay it off) to $277 or so. That's another $1128 over the course of two years. Yikes.

Paying late isn't the only reason they can raise your rates - credit card companies also run regular credit report checks just to see how much more debt you've taken on. Their logic is actually good - the more debt you take on and your ability to make payment does reflect a risk that they are taking on by allowing you to borrow from them. It's a basic rule of debt and investing - more risk equates to a higher potential rate of return. What's completely out of line here is the almost immediate change and the degree of change.

Credit card companies can raise your rates with very little notice and even though they give you the option to refuse the change, it comes with conditions that can be hard to manage for people trying to dig out. What they basically say is, "OK, you don't agree with us? Fine, keep your rate, but you have to pay this debt off in X amount of time and if you don't, you're screwed." It's a scare tactic.

If you see that your rates are beginning to go up, call your credit card company and ask them to drop it back down. If they refuse, tell them that you will move your account. If you have an otherwise good credit rating, they'll know that you can do it and will likely lower your rate. You may even be able to lower your rate if you tell them that you simply can't pay the higher minimum that comes with the rate increase. They're counting on customers not calling to dispute the change - don't let them.