Debt Consolidation

Many credit card holders sign up for a credit account with an 8.9% interest rate and then later realize that their interest rate has been bumped to 27.4%. Why?

You know that your credit score affects the credit card rates that you qualify for. But, did you know that a little clause in the fine print of the credit card terms and agreements, called the "Universal Default Penalty Clause" may mean that you're already paying a higher interest than when you signed up for the credit card? What does this fine print mean to you?

If your credit score goes down or one of your other credit conditions change, then your interest rate increases significantly. This doesn't mean any new charges you make to this particular credit card account: the higher rate affects the entire balance. Yes, even items you purchased with the understanding that your interest rate would remain the original rate.

Your credit grantors periodically review your credit report. Almost half of all credit card companies take advantage of you when you are perceived as a delinquent or high-risk borrower. The small print in your account information may include the universal default penalty, which allows the credit card company to increase your interest rate if it uncovers any of these six changes in your credit report:

1. You have a late payment on any credit account. The company doesn't care if you've never made a late payment to them.

2. You go over your available credit line on any credit account. Even if you unknowingly charge a small amount over the credit limit, which many credit card issuers let you do; your interest rate can be raised.

3. Your credit score declines. Just one late payment can hurt your credit score. Experian reports that people with no late or missed payments in the last year had an average credit score of 759; consumers with one or more late payments in the past year had an average score of 598.

4. You charge up too much on one account or many credit cards. If you charge up your credit card near the limit, or even charge up some of your credit cards over the preferred proportional amounts owed, you could pay extra for the privilege. The amount owed on a credit line compared to the available credit is termed the proportional amount owed. With a credit card limit of $5,000, the score will be higher if less than $2,500 is owed. Even better is to owe less than one-third of the available credit or less than $1501. Owing less than ten percent of the available balance gives you the best possible rating. On the other hand, owing over $4,500 on an account with a limit of $5,000 lowers your score considerably, especially if you have too many credit cards and other loans with high balances compared to available balances.

5. Your charge activities indicate a high debt-to-income ratio. If your credit card issuer sees that you've made many new charges and believes that you're getting in over your head, they may raise your interest rate. Even if this is a temporary situation, like many new home owners who make many purchases in a single month, the companies take advantage of the unsuspecting credit card holder.

6. You open new accounts. Opening new credit lines, especially consumer finance accounts, lowers your credit score and adds notations like "Too many consumer accounts" to your credit report. Once again, your credit card company may take advantage of this to raise your interest rate.

Credit cards that start with a low interest rate can jump to interest rates as high as 29.99%, if they find any of these new conditions listed on your credit report.

Check your credit card statements closely; look to see if your credit card grantor raised your interest rates. If you find that you're paying more than you thought, call your credit card company and ask the reason. Once you determine the cause, you can work on your credit issue. After you've fixed the problem, call back and ask for a reduction in your interest rate.

Copyright (c) 2005 Jeanette J. Fisher All Rights Reserved.

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