When is a credit card's 'fixed rate' not really fixed?
If your issuer practices universal default, nothing's set in stone
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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
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.
Take care of your credit!
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