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David Bach The Automatic Millionaire

David Bach, The Automatic Millionaire

What Credit Card Companies Don't Want You to Know

by David Bach

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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.

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.

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.

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.

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540 Comments

Showing comments 6-35 of 540<< PreviousNext >>
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  • Yahoo! Finance User - Saturday, August 4, 2007, 7:57AM ET  Report Abuse

    • Overall: 4/5

    Be careful of introductory offers for anything that you accept a bargain price with your credit card and each year it is automatically renewed at full price on the card unless you stop it.

  • andra - Saturday, August 4, 2007, 6:46AM ET  Report Abuse

    • Overall: 3/5

    I would like to explain something that happen to me. Be very careful with freecreditreport.com. They say it is free but you have to enter your email address, then in the very fine print you have 7 days to respond back or they will charge your account. I was charged by 4 companys for fees in excess of $65.00 in one month. Be very careful to read their fine print also. I am usually so careful not to enter my credit card number ever, but I thought they would be legitimate. You can't trust anyone any more

  • david - Wednesday, August 1, 2007, 12:07PM ET  Report Abuse

    • Overall: 5/5

    Very helpful. All need to know this type of info.

  • DavidS - Thursday, May 10, 2007, 3:21PM ET  Report Abuse

    • Overall: 5/5

    If you have a Discover card look on your statement and see if they are charging $9.99 a month for ID theft insurance. I have coverage under home owners insurance and it took over three months to get Discover to stop the charge.

  • Yahoo! Finance User - Thursday, May 10, 2007, 2:28PM ET  Report Abuse

    • Overall: 5/5

    Before reading this article I had no idea of the ways and reasons that interest rates on credit cards could be raised. This is truly an eye opener. Thank you!!

  • stilljudy - Thursday, May 10, 2007, 8:42AM ET  Report Abuse

    • Overall: 5/5

    As I former banker, it seems so incredible that the financial community can scalp people legally like that. They should be ashamed of themselves.

  • Lynda L - Thursday, May 10, 2007, 8:10AM ET  Report Abuse

    • Overall: 5/5

    This is very important information that should be made more public. Young students in college should be made aware of this as they go into the work force and before they stare families so they can be care not to get themselves into so much financial debt and lose everything and can't get their feet on the ground a gain.

  • Debra - Thursday, May 10, 2007, 12:23AM ET  Report Abuse

    • Overall: 5/5

    I work with my family and try to share this advice everyday, but it does not seem to stick...HELP. I NEED TO JOIN MOTHERS AGAINST DEBT AND OVERCONSUMPTION .ORG

  • Yahoo! Finance User - Wednesday, May 9, 2007, 7:33PM ET  Report Abuse

    • Overall: 1/5

    Your articles are so one sided. The line of credit that a bank gives you on your visa card has to be borrowed from the federal reserve. I find it funny that people will pay $8 for a beer at a baseball game that costs .56 cents for the baseball team or $7 for starbucks. Cause that is some real mark up! Last time I checked you need to make a profit to stay in business. A shoe store wouldn't sell a shoe for less that they payed for it, or less that what they need to turn a profit. If you were the one who was doing the lending of money that had to be paid back to someone else, would you give that money to people who aren't going to use that money to help make you money. The answer is.... NO you wouldn't! I'm sick and tired of the country not taking some accountability for themselves. If you agree to certain terms, then follow them. If you don't like them then don't borrow someone elses money. To you David Bach, you are breader of this. You help feed the blame someone else culture. You do bring up some good points for people to take into account so I don't completely want to discredit all that you have written in this article, just pull out the crap letting people try to blame anyone but themselves.

  • Yahoo! Finance User - Friday, May 4, 2007, 2:04PM ET  Report Abuse

    • Overall: 5/5

    I sing praises to your article. I tell my son do not use your credit card unless you absolutely need to, never for things like McDonalds, and never have it charged to more than 25% of the credit limit. If you can't pay it off in a month then you don't need it anyway.

  • Robert V - Saturday, April 28, 2007, 4:56PM ET  Report Abuse

    • Overall: 5/5

    Its a pathetic tactic used by greedy credit card companies that target the very people that can afford it the least. Shame on those credit card companies that do this. This article gives EXCELLENT advice. Stay away from these abusive credit card companies. Even if you pay your balance every month, stay away from these type of credit card companies.

  • pupps - Tuesday, April 24, 2007, 8:17PM ET  Report Abuse

    • Overall: 1/5

    meant to hit 5 stars excellent article

  • Yahoo! Finance User - Tuesday, April 24, 2007, 6:51PM ET  Report Abuse

    • Overall: 5/5

    Use credit only for hard goods--such as home or car. Jewelry, clothing, & restaurant meals are classified as luxuries. grannie

  • Berrie - Monday, April 23, 2007, 6:30PM ET  Report Abuse

    • Overall: 5/5

    Thank you for being so informative. It's great to know that someone cares to assist in directing the path of another.

  • Yahoo! Finance User - Friday, April 13, 2007, 5:58PM ET  Report Abuse

    • Overall: 4/5

    they also don't want you to know how to fix your credit, specially credit beaurous, but there is a Co. who's helping consumers to dramatically improve their FICO, you can donwload the information at no charge at www.menahomes4sale.com look for the Credit repair information it can help you to save lots of money.

  • Sugarbear - Tuesday, April 10, 2007, 2:35AM ET  Report Abuse

    • Overall: 5/5

    It's people like you that gives us the information we need to keep one step ahead of the game----Thanks

  • Terrance - Sunday, April 8, 2007, 2:12PM ET  Report Abuse

    • Overall: 5/5

    Another industry that uses the credit agencies are Home and Auto Insurers.Poor rateings effect your auto rates as well. Which I can not find the justification. If you don't pay your premiums on time your policy is canceld, Where is the credit risk to the company here ???

  • johnd - Thursday, April 5, 2007, 9:50PM ET  Report Abuse

    • Overall: 5/5

    Simple solution: Stop buying stuff you don't need. Ask yourself, "Can I possibly live one more day without this item?" You'll be surprised how much you will learn about yourself and how much money you will save.

  • Yahoo! Finance User - Tuesday, April 3, 2007, 6:40AM ET  Report Abuse

    • Overall: 5/5

    I did not know their was a clause like that Thank You. TC.

  • Yahoo! Finance User - Friday, March 30, 2007, 12:26PM ET  Report Abuse

    • Overall: 5/5

    I don't know if Discover still uses this clause or not, but several years ago I cancelled my Discover Card and have ignored subsequent "pre-approved offers" because although I had never made a late payment with them, they upped my rate for what was actually an error on my credit report related to my college loans. Good to know that some banks are dropping this clause. Great article.

  • steviepig - Friday, March 30, 2007, 11:48AM ET  Report Abuse

    • Overall: 5/5

    Journalism that emowers the consumer, unfettered by pressure from big advertizers, financial corporations. What a concept! If the consumers (and journalists) lead, the corporations will follow...Thanks!

  • Barbie Black Change - Friday, March 30, 2007, 11:18AM ET  Report Abuse

    • Overall: 5/5

    It's good to know about the Universal default clause. I'm Panamanian and I have asked my credit card company about this clause and I haven't an answer. The contract is in spanish and the word universl is not mentioned. I'm worried because here there are no legislations for the consumer. We're skinned and salted unmercifully.

  • papa - Friday, March 30, 2007, 11:00AM ET  Report Abuse

    • Overall: 5/5

    Hi; How about doing an exposse on cell phone co. abuses, and how they try to stick you with calls that you did'nt make, and expect you to pay. Thanks PAPA.........

  • Dess - Friday, March 30, 2007, 10:41AM ET  Report Abuse

    • Overall: 5/5

    Thank you, for these type of consumer reports. It is important for people to be aware of all types of hidden clauses. It seems like there are new clauses all the time, and I've seen the effects and experienced the financial damage it can do to a average income that is already breaking their back to make ends meet. The end result is devastating! So again, THANK YOU very much.

  • Don - Friday, March 30, 2007, 10:38AM ET  Report Abuse

    • Overall: 5/5

    The article has excellent points for each user of CC to follow. There is one point which I would like clarification on. I was told by realtors, financial counselors, and bankers that each time a person checks(inquires) their credit report it lowers the rating. Checking your credit report will get the same points against you as if applying for a CC or home loan. Due to this statement beening repeated to me over and over I limit the number of times I check my credit score to no more than ever 6 months. I also check my bank acct and CC activitate daily. I recently became a victim of stolen check payments which were taken from my home mail box. Since that time I have moved most all my payments to online services for better tracking. As I stated the question is, will checking your credit report often lower your credit rating? Maybe David can clear this up.

  • Jane C - Friday, March 30, 2007, 10:24AM ET  Report Abuse

    • Overall: 5/5

    I am so glad that I don't have any credit cards that have the universal default clause in it, but I wish that I would have know this information a lot sooner. Everyone should read this article.

  • Stan M - Friday, March 30, 2007, 10:19AM ET  Report Abuse

    • Overall: 5/5

    Thank you for the warning. This is just another example of what some of us are calling "Credit Cancer.” Credit presents itself as a benign friendly rescuer in times of trouble and as a pretty and enjoyable aid helping us to get what we want, when we want it. BUT, in a relatively short period, it turns on the naive, bearing its teeth and claws. It will destroy those who have fallen under its magic spell. Is credit evil? Perhaps not, maybe the fault is abuse of credit. However, the best way to go is to approach the issue with caution. Treat all credit as evil. Assume its only purpose is to devour you, body and soul and just maybe you will escape its destructive clutches. Parents, teach your children the concept of delayed gratification. You will be giving them a precious gift.

  • Yahoo! Finance User - Friday, March 30, 2007, 10:19AM ET  Report Abuse

    • Overall: 5/5

    Great advuce but I can't totally blame the big companies I decided to borrow the money; I'm paying for my poor judgement. I believe student loans should come with a warning label. I've been paying for six years on two different loans and I'm no better off than when I began. I'm not convinced these companies want to help; it's in their best "interest" that I pay more and for a longer period of time. Our economy cannot prosper while myself and so many others are spending most of our earnings on debts that (would have been paid off long ago) if not for the "interest".

  • Yahoo! Finance User - Friday, March 30, 2007, 10:16AM ET  Report Abuse

    • Overall: 5/5

    this is awesome cause some people justy go get a credit car and sign thats where they be getting them i always read now the contract on anything when im signing stuff thanks 4 this info it really helps

  • Joseph - Friday, March 30, 2007, 10:07AM ET  Report Abuse

    • Overall: 5/5

    good information. It is unfortunate what credit card companies are allowed to do.

Showing comments 6-35 of 540<< PreviousNext >>

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