Dear Credit Guy,
We had a credit card with a
fixed rate for the life of the card, and paid more than the payment due
and on time. Then, out of the blue, our rate was increased to 21 percent. When
I called to question it, I was told it was raised due to high balances on other
cards we had, which are also paid more than payment due and on time. The fixed
rate on the card was 7.99 percent, so when the rate was raised it was a big
jump. Why did they say the rate was fixed for as long as you have the card and
keep the payments up? Also, the credit card company advised us to suspend the
account in order to keep the 7.99 percent on the balance owed and to keep the
payments up to date. The company said that in six months time they would
do a credit check again, and if the balance has not been paid off, and they
find it necessary, they can up the rate again.
-- Harry
Dear Harry,
You have become the victim of a
clause in some credit card agreements called universal default.
To boil down the clause, it means that the card issuer can review
your credit, and if it believes you have become an increased credit risk, your
interest rate can be raised. The addition of the clause to your agreement,
which you signed, allows the creditor to raise the "fixed" rate. Federal law allows credit card companies to change any terms they like, including changing a "fixed" rate, with just 15 days' notice.
A late payment to any of your other
creditors, an increase in credit balances, opening significant additional lines
of credit or going over the credit limit on an account can all trigger the
universal default clause. The good news is that many consumers have complained
about this practice and now not all credit card issuers include the universal
default clause in their agreements.
If you cannot afford the increased
payment at 21 percent, I recommend that you go ahead and agree to suspend the account to
keep your interest rate at 7.99 percent. (The account will remain open as long
as you have a balance, but the agreement between you and the issuer will be
that you cease to use the card until the balance is paid off to keep the
7.99 percent rate.) After you have accomplished that, it would be a good idea
to search for a different credit card that does not include a universal default
clause in the cardholder agreement. As you found, the lowest interest rate card
may not always be the best deal if the creditor includes a universal default
clause.
Check for cards that would provide
you with a low interest rate, allow you to transfer the
balance from your old card and does not include the universal default clause. Some
credit card issuers will even waive the balance transfer fee for new customers.
I would also encourage you to take
a look at your other card agreements and determine if they include a universal
default clause. If so, you might consider moving those balances as well.
Words of caution: Part of what is
included in the calculation of your credit score is the length of time you have
had credit. If you do decide to move the balances from cards that you have had
a long time (more than five years), don't close the accounts or it may
negatively affect your credit score.
Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.
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