What Credit Card Companies Don't Want You to Know

[mini]

First, let me clear the water:  I hate credit cards with a passion.  With that stated, please read this if you have a credit card.

What Credit Card Companies Don't Want You to Know

by David Bach

Posted on Monday, March 12, 2007, 12:00AM

Of all the games the credit card companies play that end up costing you thousands of dollars (late fees, over-limit fees, transfer fees, and so on), it's always been the interest rate game that hurt the most -- until now.

There's a new, completely legal game they're playing, and it can literally wipe you out financially if you're not careful.

The Universal Default Clause

If you own a credit card, you know by now that if you're late with a payment the credit card company will charge you a late fee in addition to raising your interest rate. But did you know that they can raise your interest rate if you've made a late payment on any of your other cards, including those issued by other companies?

Not only that, but your interest rates can skyrocket to 30 percent or more if you make a late payment on your car loan, mortgage, or even your phone bill!

"How can that be legal?" you may ask. The answer is found in the fine print of your credit card agreement, and it's called a universal default clause. According to the Institute of Consumer Financial Education, currently almost 40 percent of credit card issuers apply this policy to their customers.

A Late Payment 'Trigger'

Generally, a universal default clause states that a creditor reserves the right to penalize you with an increased interest rate if you're late -- that is, in default -- of a payment to any other creditor. They justify this practice because, in theory, if you pay any of your creditors late, you pose a greater credit risk and are less likely to pay your debt.

Your creditors also have the right to routinely monitor your credit file. So a creditor with a universal default clause will be watching -- and waiting.

Let's say your Visa card has a universal default clause. Any late payment -- whether it's on your utility bill, home equity loan, or Macy's credit card -- acts as a "default trigger" allowing the bank that issued the Visa card to double or even triple your interest rate overnight. Your all-important credit score will be hurt as well.

According to a study by the nonprofit advocacy and education group Consumer Action, the top three default triggers that cause your interest rates to spike are a decline in credit score, paying your mortgage late, and paying your car loan late.

Other Triggers to Worry About

Under the universal default clause, your interest rates can be increased for several other reasons, including exceeding your credit limit, bouncing a check, having too much debt, having too much credit, getting a new credit card, applying for a car loan, and applying for a mortgage loan.

just applying?!?

How does this affect your financial future? Take a look at the numbers. Let's say you're an average American household, with $8,000 of credit card debt. Assuming you make no additional purchases on your card, you have a 9 percent interest rate, and you make the minimum monthly payment, it'll take you 218 months (18 years) to pay off your debt and you'll end up paying $3,334 in interest.

$8,000+$3,334=$11334/218=$52 bucks a month for 18 years...holy cow.

Now let's assume that for whatever reason you were late one month with your car payment. This late payment triggers the universal default clause with your credit card issuer, and now your penalty rate gets increased to 24 percent (the average default rate in 2005). It'll now take you 679 months (56 years) to pay off your credit card debt, and get this -- you'll pay $30,813 in interest.

$8000+$30813=$38813/679=$57 bucks for 56 years.  Double holy cow.

Staying Ahead of the Clause

Here are six ways to protect yourself from interest rate hike triggers:

1. Stay away from credit cards with a universal default clause.

If you're looking to open a new credit card account, be sure to choose one without a universal default clause. This means you have to truly read the fine print. If you're confused by the fine print (as many are), call the credit card company and ask what specific circumstances will affect your interest rate.

I read recently that Capital One cards don't have a universal default clause (although you should double-check before applying), and Citi has dropped its universal default policy as well. In addition, sites like CardWeb.com, Bankrate.com, and LowerMyBills.com let you compare credit card offers, so visit them before you apply.

2. Know your current obligations.

Check your current statements and credit card agreements to find out your current interest rates, and to identify which cards have a universal default clause that you weren't aware of until now. Again, if you're uncertain after reading the fine print, call your credit card company.

Consider transferring your balance from a card that has the universal default clause to one of your cards that doesn't. But don't rush to cancel the card altogether, because it could have a negative effect on your credit score.

3. Run your credit report.

Not only do you need to know exactly what your current interest rates are, you also need to know exactly what's on your credit report. Visit Freecreditreport.com or myFICO to order your credit report and credit score today.

4. Pay your bills on time.

According to the American Bankers Association, late payments for most types of consumer loans were on the rise during the third quarter of 2006. If you're having trouble with your credit card payments, at the very least strive to make your minimum payment on time.

5. Be proactive -- call your lender for relief.

If you're struggling to make monthly payments on your other bills, like utilities, car payments, or mortgage payments, call your lender to see what options they might be able to offer you. They might be able to adjust your monthly payments so that they're more manageable.

Your goal is to protect your credit report and credit score with a consistent record of on-time payments.

6. Fight back for your money -- write your local legislator.

Right now, there are amendments to the Truth in Lending Act that, if passed, would prohibit many unfair practices within the credit card industry -- including the universal default clause.

As a consumer, you can take action by letting Congress know that you want laws to protect your rights. For more information on how you can be heard, visit Consumer Action's web site.

As I write this, Congress is holding hearings to discuss the abusive and deceptive practices of the credit card industry. Read more about it here.

A Good Night's Sleep

Obviously, what you don't know really can hurt you. Check today and see if you have the universal default clause on your credit cards.

If you do, be careful to stay on top of your debt. Better yet, find a credit card that doesn't have the clause -- you'll sleep better at night.

http://finance.yahoo.com/expert/article/millionaire/26303

And better yet, coming straight from Dave Ramsey, cut up your credit cards!

[M‡¢ĦÆŁ Ҝ]

And better yet, coming straight from Dave Ramsey, cut up your credit cards!

I would love to, but I travel too much.  While cash is accepted almost everywhere, exchanging currencies is not convenient, and most banks change a fee for that service.  Besides carrying large sums of cash is not wise when travelling.  Traveller's cheques are nice, but not accepted everywhere, especially in overseas locations.  A major credit card, however, is almost universally accepted.  So, for those who travel a lot, a credit card is a "necessary evil".

[Raecheal]

I have three - lol - but only use one or two every so often to build up credit.

[Charlene]

Thats what I did to build up credit. My husband has no credit or very minimum. I was able to get our vehicle loans on my own with the lowest interest rate available.

[Nelle]

I did know about the raising rates even if you're late on ANOTHER credit card. We talked about it in one of my classes last week or that meeting I had on Tues night... can't remember which one tho.

I have some stores cards, but other than that, I have a citi card that I haven't activated yet. I've had it for about a year.

[myhaloisintheshop]

I have a Capital One card--we are using it to rebuild our credit. 

[mini]

:soapbox:

I was thinking (understand, this is just a random brain spasm, so hold back on the sacrificing here) but WHY do you need credit?

Boiled down, hashed out, and turned every way but loose, its so you can go deeper in debt, right?  Or thats the way I am looking at it.

Ok, if we take that line of thought, along with the "I need credit" line of thought, and really look at them by themselves, we need credit for major purchases, mostly.  Instead of "I need credit so I can buy this on credit" we could save that same money instead.  If you want to purchase a house, and have a solid savings account at the bank you want to finance it through, would they not jump to help you out? I'm saying this without knowing, so its just a thought.  And if a credit card is necessary, why not use a bank card?  After all Visa is accepted at about a bazillion places world wide.  *cough*

Instead of buying that new car, and paying payments that we cant really afford, why not settle for a used car, have no payments, save the payment money that you would have been spending and buy a better car later?

Or the same with anything else you can imagine.  I think at one point we had 7 credit cards, and the debt to go along with it.  And its stupid to owe that much money on clothes, gadgets, and other assorted junk.   

:/soapbox:

[myhaloisintheshop]

Did you know that your car  insurance premiums are based somewhat on credit? 

Right now we bank at a small bank and they look at your credit but what impresses them more is that you have a savings account that you regularly contribute to.  So that is what we do.  We don't put much into it but every little bit helps.

[randerzforya]

My hubby's parents co-signed on his truck so that his payments would be lower, then after two years he got it put solely in his name, he also took over 4-wheeler payments when his friend needed out from underneath it, so he built up a little credit before he was even 18. We had a sams card, which we used once at Christmas time and maxed out, we finished paying that off and cut it up. Our computer is also on a Best Buy credit card, we've almost got it payed off and then we're cutting that card up also. We're currently looking at all of our options for which credit card we want for emergencies, but as soon as we build up a nest egg that we feel safe with, then that will be cut up too. We're both spenders, and it's just too easy to buy things "just because we can". Honestly, unless you travel a lot then I don't see the need for a credit card. Our parents and grandparents warned us about credit cards and what damage it can do to your credit if you aren't really careful. We don't have much credit, but I guess with sooo many people have bad credit around here that the bank was more than happy to give us a good deal on a loan for our first place. (We took both our moms with us to make sure we weren't being "handled". lol And I'm glad we did, they helped a lot!)

I have a lot of friends in college right now who got credit cards right out of high school, they're 21/22 years old and are already thousands of dollars in debt. I am soooo glad that we didn't go that route.

[Charlene]

I totalled my car..needed another one...couldn't afford one without having to finance at least something b/c I was newly married....having good credit saved me a lot of money in the long run b/c I didn't have a really high interest rate.

[Raecheal]

Credit cards aren't bad - if used responsibly, they can be great.. IF being the key word and if they aren't, it's no one's fault but the credit holder's. Without credit history, it's just harder to obtain certain things.. I may not need it - but when everything I do is transferred to under my name, I'll have an easier time because I do have great credit.

[Elfin]

As someone who is going through the mortgage application process - I can tell you that if you want to own a home you NEED CREDIT.  Nick and I have very decent credit scores and no black marks for late payments on our reports...however, when getting the score, the biggest thing that's knocked down our score a little is that I don't have a very long "credit history" - because I've only had 1 credit card for < 3 years.  Our credit is still good - but it could be better if I had more cards for a longer period of time.

The easiest way to build credit & not get caught in these traps... PAY OFF YOUR BILL...  EVERY MONTH.

We have never carried over debt to a following month...therefore, the interest rate has never concerned us.  And trust me, there have been ~tight~ months where it would have been easy to say "Let's just pay half this month's credit card off, but carry over the other half for another month" to make things easier.  But we just simply don't do it.

If you own your own home and don't plan on buying another one any time soon, then cutting up all your credit cards might be a fine thing.  But if you ever want to buy your first home or if even if you want a great rate when trading up your home, it's smart to have credit cards - but pay them off!

[AmberMarie]

I agree with Eflin (maybe because I'm a mortgage consultant)...credit is extremely important if you are buying a house. Unless you have $100,000 saved up, and want to buy a $100,000 house, you need credit.

If you cant trust yourself with a credit card, why would a lender trust you to pay a mortgage note on a $100,000 house?  That's just crazy!

Credit cards are great for lots of things. I have 3. I'm 20 years old and have a 765 credit score.    I pay of my credit cards every month....I have never ever ever missed a payment. I use them when I travel...and i get tons of skymiles by using my cards. When I lived in africa this summer, i didn't have to exchange cash not one single time. I used my credit card or debit card for everything. It really makes things easier and saves money (exchange fees can add up quickly)

Credit is one of the greatest freedoms we have. Use it to your advantage! 

[AmberMarie]

Article from MSN Money's homepage today...

5 people who check your credit
It's not just lenders who check your credit score. A bad score can also make it costlier to get insurance, an apartment or a cell phone -- and harder to get a job.

By Kiplinger's Personal Finance Magazine
How much do you know about your credit score? That three-digit number is tied inseparably to our financial lives, yet many young adults haven't given it the attention it deserves. Your score can play a role in your ability to rent an apartment, qualify for a loan or even get a job. It can also affect how much you'll pay on interest charges, insurance and even cell phone contracts.

Make building a stellar score a priority while you're young and you could actually save hundreds or thousands of dollars over your lifetime. However, if you don't take your credit seriously, a bad score -- or even a nonexistent score -- will cost you.

Who's keeping score?
Your credit score is basically used to predict the possibility that you won't pay your bills. Scores are compiled by Fair Isaac Corp. and are sometimes called FICO scores. The top possible number is 850, but topping 800 is probably unrealistic. A median score usually falls in the 720-to-725 range, meaning half of consumers fall above that point, half below. Even if you haven't given your FICO score much thought, there are plenty of others who have or will, so you'll want to aim for the mid-700s to make the best impression on:

1. Lenders. This group is the one most people associate with their credit score. Having a good rating can help you qualify for the best rates on a mortgage, car loan, credit card and even a small business loan if you've got that entrepreneurial spirit. A nonexistent score can make it impossible for you to qualify for a loan or credit card at all.

2. Insurers. The majority of auto insurance companies use your credit score when determining your rates, and the practice is also common among home insurers. A recent survey by Consumer Reports among eight popular auto insurers found that drivers with top scores could pay up to 31% less on their premiums than if credit scoring wasn't factored in, while those with bad scores would pay as much as 143% more.

3. Landlords. Increasingly, you may need a good credit score to rent an apartment. Landlords view your credit rating as a measure of your responsibility to pay bills on time. If your rating is below par or you don't have a credit score yet, you may have to find a friend or relative to co-sign your lease, or you could be required to pay a higher rent or security deposit.

4. Employers. When you're applying for a job, potential employers can pull your credit report as long as they notify you first. And, in fact, about 35% of them do, according to the Society for Human Resource Management. Why? Bad credit can be a signal of irresponsibility, or employers might be worried you'll spend more time fretting about your financial woes than concentrating on the job.

5. Cell phone carriers. Even cell phone service providers may check your credit before signing you up for a plan. They want to make sure you're responsible and will pay your bill each month. Some utility providers may pull your report as well. If you have credit issues, you may not qualify for the best plan rates, you could be required to pay a deposit, or you could get turned down.

True cost of your score
So, how much does your credit score affect your finances? Say we have two friends, Jim and Mark. Both took steps right out of college to start building a credit report by getting their first credit cards and an auto loan. Jim made all his payments on time, never maxed out his credit cards and often paid more than the minimum required. Mark, however, frequently paid late, overextended his cards and applied for new credit to bail him out of his mismanaged debts.

Now both are ready to buy homes, and they each apply for a $250,000 30-year mortgage. Through Jim's responsibility, he's been able to build a score of 750, qualifying him for a loan with a 6.2% interest rate, according to Fair Isaac, the scoring bureau. Mark's score comes in around 650, netting him a rate at 7.3% interest. Jim's monthly mortgage payment is $1,536 while Mark pays $1,718 -- a difference of $182 per month. If they both live in their homes for 10 years before selling or refinancing, Mark will pay $21,840 more in monthly payments than his friend. Ouch.

Mark also gets burned on a new auto loan -- paying $1,332 more over three years on a $20,000 loan than Jim. Plus, Mark probably paid much more for his car insurance than Jim.

How to get started
Even if you don't plan on applying for a loan or getting a new apartment or a new insurance policy anytime soon, it's a good idea to start building your credit score now so it's there when you need it.

When you're starting from scratch, a good place to begin is in college, where lenders hand out credit cards like candy. But don't rush to indulge. Janet Bodnar, Kiplinger.com's Money Smart Kids columnist, advises students to get just one card their junior or senior year, use it occasionally and pay off the balance each month. It's much easier to qualify for a credit card while you're in school than after you graduate (lenders figure that Mom and Dad will bail you out while you're in college if you can't pay your bill).

If you're already out of school, or you don't trust yourself with a full-fledged credit card yet, a secured card will help you get off on the right foot. This card allows you to make a deposit with a lender (such as your bank or credit union), and the amount usually becomes your credit limit. The issuer takes on zero risk because if you don't pay on time, it can dip into your account to cover the bill. Most issuers require a deposit of $300 to $5,000. You build a history just as fast with a secured card as with a regular one. And after making payments on time for a year with a secured card, you should have an adequate history to switch to an unsecured card and get your deposit back.

A new scoring system from FICO may soon help young adults trying to build a credit history. It is based on alternative data such as whether you pay your electric bill on time and maintain a clean checking account. So you'd do well to keep all areas of your finances in tiptop shape.

Boost your score
Knowing what goes into your credit score can help you manage your debts well. Here's how to make the best impression on your credit history:

Pay on time. 35% of your score depends on your payment history.
Don't max out your cards. 30% of your score is based on how much you owe. You want to keep your "credit utilization" ratio -- the percentage of your credit limit that you've actually used -- no higher than 30% of your available credit limit.
Start while you're young. 15% depends on the average age of your accounts.
Avoid opening several accounts at once. Not only will this lower the average age of your accounts, but lenders will worry that you might go on a borrowing binge. 10% of your score depends on new credit.
Get the right kind of credit. This accounts for the final 10% of your score. Your experience with revolving credit, such as credit cards, on which you control how much you charge and pay off each month, carries more weight than installment debt, such as car loans and mortgages, with fixed payments. But don't simply stock up on a pocketful of Visas -- lenders like to see that your money skills are well rounded.
This article was reported and written by Erin Burt for Kiplinger's Personal Finance Magazine.

Published April 17, 2007

[SippinTea]

Amber, what's a safe way to check your own credit score? Is there a secure site online that you can recommend?

[randerzforya]

1. Lenders. This group is the one most people associate with their credit score. Having a good rating can help you qualify for the best rates on a mortgage, car loan, credit card and even a small business loan if you've got that entrepreneurial spirit. A nonexistent score can make it impossible for you to qualify for a loan or credit card at all.

The banks out here told us little/no credit today is just as good as good credit in their eyes. Sooo many people have bad credit (which is hard to fix), that when they see young couples/people with little or no credit, they have no problem giving them a loan. As long as you have a steady job, and you're up to date on what payments/bills you DO have, then you should have no problem qualifying for a loan with a good interest rate. We have very little credit between us, but we were able to pre-qualify for a $50,000 loan at a nation-wide bank, and a $100,000 loan at a local one both at very low interest rates. I do see the upside of having credit cards, we just honestly don't need them, and it would be a pain in the butt to pay an extra bill every month when we can just afford to buy what we need/want with cash.

And I guess I just see too many people buying EVERYTHING with cards and getting in over their heads before they realize it. I'm a big worry wort, and I'd rather not have an unnecessary bill to stress over. (Especially since my mother's cards have gone sky high on interest rates lately..and her credit is absolutely perfect.)




Oh..and I've also been told that it's bad to check your credit score. It shows that someone looked but "declined" to give you a loan. Any truth to that rumor?

[AmberMarie]

freecreditreport.com is supposed to be good. Now, they wont give you an actual score but you can monitor your credit and correct any issues. I think they give an A, B, or C type rating.

Every industry has a different way of scoring your credit. Your mortgage score may be higher than your Auto insurance score, etc. Be careful of who you let pull your credit...especially if you are looking at making a major purchase.

Oh yeah, each time its pulled, it hits your score...usually for a few points. However, if you are shopping for a car, and all of the car dealers pull your credit. All of the credit pulls within 2 weeks are lumped together into just one hit on your score.

[AmberMarie]

1. Lenders. This group is the one most people associate with their credit score. Having a good rating can help you qualify for the best rates on a mortgage, car loan, credit card and even a small business loan if you've got that entrepreneurial spirit. A nonexistent score can make it impossible for you to qualify for a loan or credit card at all.

The banks out here told us little/no credit today is just as good as good credit in their eyes. Sooo many people have bad credit (which is hard to fix), that when they see young couples/people with little or no credit, they have no problem giving them a loan. As long as you have a steady job, and you're up to date on what payments/bills you DO have, then you should have no problem qualifying for a loan with a good interest rate. We have very little credit between us, but we were able to pre-qualify for a $50,000 loan at a nation-wide bank, and a $100,000 loan at a local one both at very low interest rates. I do see the upside of having credit cards, we just honestly don't need them, and it would be a pain in the butt to pay an extra bill every month when we can just afford to buy what we need/want with cash.

And I guess I just see too many people buying EVERYTHING with cards and getting in over their heads before they realize it. I'm a big worry wort, and I'd rather not have an unnecessary bill to stress over. (Especially since my mother's cards have gone sky high on interest rates lately..and her credit is absolutely perfect.)




Oh..and I've also been told that it's bad to check your credit score. It shows that someone looked but "declined" to give you a loan. Any truth to that rumor?

That may be true at a bank. However, you will also pay a higher rate on most loan programs at your bank...and they have limited flexiblity as to what programs they can do.

For most other people, no credit is as bad as bad credit. 

[randerzforya]

Well we have our emergency credit card, maybe we'll start using it to make purchases here and there..see if we can keep up with it. I just know that I tend to be a "spender" and it's taken me time to reign in those impulses, I'm afraid a credit card might get me back in the habit of buying what we really don't need.

[AmberMarie]

You can always do something like using it only for gas or something else you have to buy anyway.

[Elfin]

Well we have our emergency credit card, maybe we'll start using it to make purchases here and there..see if we can keep up with it. I just know that I tend to be a "spender" and it's taken me time to reign in those impulses, I'm afraid a credit card might get me back in the habit of buying what we really don't need.

One thing that might be a way to keep you in control of how you spend (and not overdoing it on credit) is to put a regular "bill" to be taken out of your credit card(s).  For example, we get our Comcast bill and our Verizon bill directly out of credit card, rather than "direct debit" out of the bank account.

Yes, that means now you have another "bill" you have to think about paying...but if those were regular expenses you'd have taken out anyway, you could use them to pay those regular bills & continue to use your debit card to make clothes/food/etc purchases if you don't trust yourself not to go overboard on those areas.

Just my thoughts on the matter...Amber might have better advice, since this is a lot closer to her profession.

lol - NM - she beat me to it...  But, yeah, gas is another thing that you could just use it for.  There are some cards that are specifically for different gas stations...I think Nick used to have an ExxonMobile card...

[randerzforya]

Well thanks to both of yall. lol I hadn't thought of using it for a regular bill or to pay for something like gas. That's a good idea, I'll have to sit down with my hubby tonight and talk to him about it. Even though we have our loan, it'd still be nice to get the credit score higher. If for nothing else, then at least to just know we have it if we do ever need it.

[RandyWayne]

A few other big advantages (actually requirements) to having a card is the ability to purchase online or over the phone, and to be offered a certain amount of protection (for amounts over $50) if a transaction goes bad.

[Nelle]

I know one thing.. just putting gas on the card can add up to very big bucks, haha. Mom does that with her card plus the occasional groceries, and it's not any small thing to cough at.

[Raecheal]

I buy a few things (groceries, a meal here or there and my monthly cell bill) on my credit card - I pay it off the next week or the week after. It works fine.. I started with an incredibly low limit to build up - so I wouldn't get into trouble. Now that I know I can handle it, my limit's been upped and I'm okay