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:
Late Payment
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.
