If you don't read the fine print on your credit cards, you're just asking for your blood to be sucked. Millions of people use credit cards to buy things these days. If you pay for something with a credit card, be aware that the 9 percent interest rate you thought was fixed could actually go as high as 30 percent, and you might not know this until you get a bill for the past due amount.
"Penalty interest rate" and "universal default" are terms that banks include in their credit card offers. They say that these terms are needed to balance out the risks. These rules are legal as long as the people who made them can say they told you about them. All of the rates and fees in these rules are too high for the risks they pose. In the past, issuers have protected themselves in better ways. For instance, they used to cut off customers when they reached their credit limits, which I thought was good for the user.
Now, they let you keep spending so they can charge you over-limit fees (up to $29 per billing period) and always higher rates. This can ruin the budgets of a lot of users. So be careful and always read and understand the small print before it's too late.
Even if you are only an hour late, you should never pay your credit card bill, because your interest rate could go up for good. According to what credit card companies told the Senate banking committee in May 2004, penalty rates brought in $14.8 billion, or 11 percent of their income. This year, the average penalty rate was about 24 percent, according to Consumer Action. Even worse for the user, the new rates can be used to charge for purchases that have already been made. Most companies give a specific date by which payments must be made. If they don't say, you should get in touch with them to ask.
Be aware that credit card companies can raise your rates because you are now considered a high-risk customer, even if you are late on your mortgage or another payment. This is called "universal default." Consumer Action found that one bank had a default rate of 35 percent for everyone.
Too many people looking at your credit history can also cause your universal default rate to go up, and you may be charged a fee, which will lower your credit score.
In 2003, late fees brought in $7.7 billion for credit card companies. There is no law that says how much interest banks can charge. And in 1996, the Supreme Court said that states couldn't set limits on late fees.
Legislation is being worked on to get rid of "universal default" interest rates based on supposed mistakes with another issuer, make sure that penalty fees match the costs of the issuers, and get rid of over-limit fees. Time will tell if this really happens or not. But until then, you have to be extra careful and read every small print because it's all there.
