3/22/06

How to avoid credit card traps

How the new "Universal Default Clause"

can hurt your pocketbook


By Steve Johnson


You've worked hard to improve your credit score by making sure you've paid all major credit cards on time every month without fail. So, could a late payment to the local video store rental club unravel all you've achieved?


A record number of credit card companies have built "universal default" clauses into their agreements, which allow them to raise your interest rate if you're late making a payment -- even to someone else!


Is there such a danger lurking in the fine print of your credit card contract (blithly referred to as "the agreement" by the companies)? Is there a nasty surprise waiting inside your next monthly credit card statement?


Lately, news reports of more and more people becoming aware of the so-called "universal default" clause buried in the fine print in their credit card agreements; becoming aware not because they were curious about this heavy-handed new trend, but because they have been personally affected by the clause -- a clause that sometimes spikes the monthly revolving interest rate up as high as 30%!


How could this happen, you say? Well, some credit card companies -- apparently on a new search to implement new fees to increase corporate profits -- have introduced this onerous high-interest penalty on their customers.


Is it fair? Not in the minds of those affected -- and certainly not to those who have never even missed a payment due date with that particular company!


See, the universal default clause could affect you if you so much as get a late medical bill (which is a common occurance since hospitals in our part of the country are notorious for having outdated billing systems).


The trend is definitely on the rise. A recent survey detected nearly 4 out of 10 credit card issuers report that they apply the rule to their customers, even if those customers had no late payments on their own card! (How's that for "customer service" ?!?!)


It could affect you if your credit score slips due to a late car payment, or a late utility bill, or a number of other reasons that you probably won't know about until it's too late and you're faced with loan-shark-level interest rates on your total balance. It could involve a late phone bill or a forgotten $15-a-month book subscription service -- easy to forget, yet hard to swallow when the higher credit card interest kicks in.


It's a shame that these companies take advantage of the very people who are contributing to their record profits by basically playing hardball over trivial payments, especially when these payments do not affect those companies' stream of regular payments in any way. They can profess that such behaviours present an unacceptable credit risk for their shareholders. But they should be ashamed of doing this to ordinary, hardworking middle class people who are struggling to make ends meet.


Three solutions come to mind:


(1) Get rid of debt now. Make the decision to read over the free information on this website and do whatever it takes to eliminate the balances on these credit cards, and once they are paid off, call the company and close the account.


(2) Be careful to make all your future payments on time, and aim to make them BEFORE they are actually due.


(3) Carefully, cautiously, painstakingly, read, read and re-read all future (even current) credit card agreements you are affected by. I've noticed a few of my card issuer's have included new terms and agreements in recent credit card statements that specifically tell me they DO NOT follow this practice -- but then go on to alert me to other penalties I could face if payments are ever late.


The solution for me -- and hopefully for you -- is to develop a satisfactory, working system to track all your debts, pay your bills on time, and take steps to reduce debt through the tips found on this website and at others. We've tried our best to link to good quality recources to help you in your quest.

There is a great new book we've come across, "Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom" written by Attorney Robin Leonard and published by NoloPress, that offers a comprehensive solution to getting your finances in order. It's a great resource.


Paul Richard, executive director of the San Diego-based nonprofit Institute of Consumer Financial Education was recently quoted as saying:


"Universal default complaints are definitely on the increase -- at a disturbing rate. More than one-third of major credit card issuers now say they act on these clauses regularly."


He added that many consumers were still unaware of the dangers because they either don't read or don't understand the credit card agreement. I, for one, would like to add an "Amen" to this last reason, as the language of these agreements seem like you're signing away ALL of your rights!


Scott Bilker, author of "Talk Your Way Out Of Credit Card Debt" reports a growing number of credit card companies check your credit file at regular intervals, and if you're late paying any other bills -- not just theirs -- they raise the low interest rates enjoyed at the beginning of your cozy credit relationship you started with them, and, in many cases, double or triple what you are charged to carry a balance!


Credit card firms have ways to review your credit report monthly, quarterly, even yearly. It is also true that some companies never do this (yet!). Experts note that customers who have made late payments on their accounts in the past can expect to get reviewed more often than those who always pay their bills on time.


The real worry growing is that this default clause can do lasting, unexpected damage to your FICO credit score in ways most people have never imagined. Sometimes it could happen at the worst possible time, like right when you are planning on buying a new car or a new home. Problem is, at the time negative marks appear on your credit report, the scores will drop, the damage is done, and only the passing of time and intensive effort on your part will be required to start the process of improving your credit history all over again.


More questions you need to ask yourself:


Do you carry a large credit balance? Transfer to a low fixed rate card that does not include the universal default clause buried in the fine print. If you are unsure, call the issuing company and ask.


Do you know what's happening with your accounts? Review them carefully. Read over each bill when it arrives in the mailbox, check its due date, pay the bill RIGHT THEN, or mark on your calendar when to mail it (we recommend mailing it ONE WEEK BEFORE THE DUE DATE or else making the payment online THE DAY BEFORE IT IS DUE. For added safety, you can pay about 60cents at the U.S. Post Office to have your credit card check signed for. If you have 5 or less bills you pay this way every month, that would only add up to $36 for the year, and you'd have written proof as to when those payments were received if a dispute ever arose.


Do you know how to file a dispute with the companies you do business with? We are rapidly leaving behind the days when you can call up and ask for forgiveness for a late payment, it just doesn't work well these days. But if you take action promptly to work out something with your lender or with your credit card issuer, then perhaps you have a chance to avoid these incredibly high interst rate surcharges. Don't avoid the problem and wait to deal with it until after your account has been sent to a collection agency. By this time, your credit score is probably doomed to deflate.


Do you have lists of your credit cards, balances, limits, interest rate and payment due dates safely tucked away where you can quickly find them? Get your financial house in order and come up with a master bill paying list to help yourself track which payments are due when. Usually, this is pretty easy, since most payments fall due on the same day of each passing month. A cheap calendar ought to work in a pinch.


Is the timing of your payments creating a hardship? If you are paid twice monthly, and your payments all come due at once in the month, perhaps you need to get in contact with your credit card companies and ask them to have your due dates changed to help you make the payments on time. I've found that most firms appreciate such a proactive approach and will do what they can to accommodate you.







"Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom"

Do you pay your bills ON THE DAY THEY ARE DUE or do you allow proper time for mail delivery? Maybe you can give yourself a comfortable cushion by paying your monthly bills when they arrive in your mailbox instead of piling them up on your counter or in a drawer in your desk and paying them when they are due. We all get busy. It's easy to forget a due date every now and then if the information isn't right in front of you. Better to keep the reminders in plain sight than to hide them away. Even better: write out the check the very same day you receive the bill, put in in the payment envelope with receipt, and place these in a hard-to-miss place in your home (perhaps under a magnet on your refrigerator?) No, you don't have to mail the check until it's due and you have the funds in your checking account (Never pay a bill until the money is in your account!!!), but getting into the habit of writing your bills out ahead of the due date will help you from falling into the late-pay trap.

Do you pay bills automatically by electronic draft or through online bill pay options? If not, consider experimenting. I used to say I'd never do this, but for the past 2-3 years, I don't think I've paid for a stamp to pay credit card payments. I've always paid my bills online. It's easy, and you can tie your payment schedule to e-mail reminders.


When you apply for a new credit card, do you read the fine print? Yes, those new juicy zero-interest intro offers look good at first, but you might be stepping into a financial landmine if the terms don't offer you some protection from things like the universal default clause we've discussed here today. Never let your guard down and forget the fact that you are entering into a legally binding agreement... one that could cost you dearly if you're not careful.

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