The Most Common Reasons for Interest Rate Increase Are...
In this article I will give you several tips on how to avoid interest rate increase on your cards and warn you about the common pitfalls you should look for.
With little effort and focus you will be able to keep your budget healthy while enjoying the benefits of your credit cards.
The Universal Default Penalty Clause
As you already know, one of the biggest money makers for financial institutions issuing credit cards is the "Universal Default Penalty Clause".
This fine print term allows the company to change your interest rate - and not to your benefit - in response to something that happens on another account you have.
You may receive a new credit card at the attractive interest rate of 9.9% and build a balance that you pay on monthly.
A few months later you look at the statement and realize your interest rate has been changed to 32.9% despite that you have paid your bills on time every month. How can this happen?
Well, you did receive a notice about it, didn’t you? But if you are like many other people, you assumed it was one of dozens of envelopes from your credit provider filled with promotion or special offers for another services and you simply didn't read it.
Even if you read it, you still might not have any idea what it said as the interest rate increase is often described in legalese and in print you need a magnifier to read.
After you are granted a credit card the bank routinely takes a look at your credit periodically.
You might think they are only concerned with defaults or bad payment records but that's not the case.
Any change in your credit score or one of many other credit "conditions" may trigger a change in your interest rates. The most common reasons used to justify huge interest rate increase are:
Any late payment on any credit account. It doesn't matter if your payment has been on time every month for 10 years.
If you are late on one of your other credit card payments, you are at risk of having all your accounts shoot up in interest charges. One late payment can hurt your credit score - you realize that.
Anything that results in your credit score being lowered increases the chance that your interest will be raised.
According to Experian, those with no late or missed payments in the past full year had an average credit score of 759. However, just one late payment could reduce that score to 598. Guess what happens to your interest rates!
Your Credit Limit
If you exceed your credit limit on any account even by a small amount you would surely also see an interest rate increase as well.
This is true even if you made a major purchase and the lender approved you going over your limit for that purchase.
Using Your Card More Than Usual
If you use your credit more than usual and your accounts are near the limit, it may cost you. This is referred to as the proportional amount owed.
The best practice is to use only 30-50% of the credit available on any of your cards. The credit rating bureaus view high proportional amounts as a sign of financial risk and lower your scores accordingly.
If your account limit is $3,000, never let your balance be above $1500. If you need to use $3000 in credit, ask to have your limit raised to $6000.
If you have multiple credit cards and other loans that have high balances, this can cause real problems for you as all of your credit accounts may increase in interest at the same time.
Ratio of Debt To Income
This is a problem often encountered by someone who has purchased a new home or rented an apartment.
From curtain rods to pots and pans they shop for their new home in a short period of time and spend an amount that doesn't match their monthly income.
It's a temporary situation and may never happen again - but it opens a window of opportunity for predatory lenders and they are quick to take advantage of it.
There is good news about cross default clauses. The abuses became so blatant that this practice will be banned under new credit protection laws passed in 2009.
That doesn't make you safe today as the law does not take effect until February of 2010. Until then, protect your credit and follow the tips above.