Many people sign up for a credit card with an interest rate of 8.9 percent, only to find out later that their rate has been raised to 27.4 percent. Why?
You already know that your credit score affects the rates you can get on credit cards. But did you know that the "Universal Default Penalty Clause," a small part of the credit card terms and agreements, could mean that you're already paying a higher interest rate than when you signed up for the card? What do you think this small print means?
If your credit score goes down or if one of the other terms of your credit changes, your interest rate will go up by a lot. This doesn't mean that any new charges you put on this credit card account won't be affected by the higher rate. The higher rate affects the whole balance. Yes, even on things you bought when you thought your interest rate would stay the same.
Creditors will look at your credit report every once in a while. When you are seen as a bad borrower or a high-risk borrower, almost half of all credit card companies take advantage of you. The universal default penalty may be in the fine print of your account information. This lets the credit card company raise your interest rate if it finds any of these six changes in your credit report:
- Your credit score declines. Just one late payment can hurt your credit score. Experian says that the average credit score for people who haven't been late or missed a payment in the last year is 759. The average score for people who have been late or missed a payment in the last year is 598.
- On any credit account, you go over your credit limit. Even if you charge a small amount over your credit limit by accident, which many credit card companies let you do, your interest rate can go up.
- You start new bank accounts. When you open new credit lines, especially consumer finance accounts, your credit score goes down and your credit report gets notes like "Too many consumer accounts." Again, this could be used by your credit card company as an excuse to raise your interest rate.
- You put too much on one account or too much on a lot of credit cards. If you charge up your credit card close to its limit, or if you charge up some of your credit cards over the preferred proportional amounts owed, you might have to pay more. The proportional amount owed is the difference between the amount owed on a credit line and the amount of credit that is still available. With a $5,000 credit card limit, if less than $2,500 is owed, the score will be higher. Even better is owing less than one-third of the available credit, or less than $1501. The best score you can get is if you owe less than 10% of the available balance. On the other hand, owing more than $4,500 on an account with a limit of $5,000 hurts your score a lot, especially if you have too many credit cards and other loans with high balances compared to available balances.
- You haven't paid on any of your credit accounts on time. It doesn't matter to the company if you've never been late with a payment.
- The way you use your credit cards shows that your debt-to-income ratio is high. If the company that gives you your credit card sees that you've made a lot of new charges and thinks you're getting in over your head, they may raise your interest rate. Even if this is only temporary, as it is for many new homeowners who buy a lot of things in one month, the companies take advantage of the credit card holder who doesn't know what's going on.
When you first get a credit card, it might have a low interest rate. But if any of these new things show up on your credit report, the rate could go up to 29.99 percent.
Check your credit card statements carefully to see if the company that gave you the card raised the interest rates. If you're paying more than you expected, call your credit card company and ask why. Once you know what's going on, you can start to fix your credit problem. Call back and ask for a lower interest rate once you've fixed the problem.
