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Avoid credit card rate hikes
Understand the universal default interest rate and how it can hit your wallet.
November 30, 2005: 3:12 PM EST
By Gerri Willis, CNNMoney.com contributing columnist

NEW YORK (CNNMoney.com) - Credit card issuers are upping the interest rate you pay on your debt even if you pay your bills on time, according to a study from Consumer Action, a consumer advocacy group.

And this survey of 47 banks shows that anybody, not just people with financial problems, can face higher credit card interest rates due to a policy called universal default.

In today's five tips we'll give you the lowdown on universal default interest rates and tell you what you need to do to avoid them.

1. Understand the lingo

The "universal default" clause means that the issuer can raise your interest rate automatically if you're late on payments elsewhere or if the bank feels you have taken on too much debt. The logic behind the practice is that the bank has reason to believe the customer poses a greater risk.

Credit card issuers are raising consumer rates as much as 35 percent due to the default clause, depending on how consumers handle their other credit accounts.

According to Consumer Action's survey, other reasons you might incur the default rate include: your credit score getting worse, paying your mortgage or car loan late, going over your credit limit, bouncing a payment check, incurring too much debt, having too much available credit, getting a new credit card or inquiring about a car loan or mortgage.

You may even trigger universal default if you have medical bill payment disputes, according to credit specialist Gerri Detweiler.

2. What it could mean to you

Incurring a default rate means boosting your overall debt -- dramatically.

Say you have an average amount of credit card debt, which is $8,500.

If you're paying the minimum when you incur a universal default penalty rate, which run at around 24 percent, you'll end up paying $16,554 over 31 years. That's $8,054 in interest alone.

After a year minimum payments while incurring the default rate, you'll still owe $7,534. That's because your $255 minimum monthly payments are barely making a dent in your principal.

Compare that to a more attractive rate of 9 percent. Then your total interest costs are $2,773.

3. More fees on the horizon

It's just not universal default that you have to worry about. According to the study by Consumer Action banks are also charging higher annual fees, cash advance fees that average about $41, bounced check fees, overdraft fees and cut-off time on due dates.

The average late fee this year is almost $28 according to the report.

4. Fight back

Use a card that doesn't have the risk! Joseph Ridout of Consumer Action recommends credit union credit cards. You won't get the rewards, but you'll also be free of universal default.

Other issuers have also decided not to include universal default in their policies. Some of those banks include Capital One, American Express and Bank of America.

Discover Card has also recently decided to discontinue the practice of universal default according to Ridout. If you find out you are at risk (you can do this by calling your issuer) there are some ways to fight back.

Cut the number of credit cards you have, especially if you're holding onto department store cards. According to a new study, credit cards issued by retail stores in New York have rates that are twice as high bank-issued cards.

5. Watch the minimum

At the end of the year, credit card issuers are expected to boost their minimum amounts owed from about 2 percent to 3 percent. That means if you carry a lot of credit card debt, you'll be facing higher out of pocket costs.

The good news is this: if you have a smaller principal, you'll end up paying off your debt faster.

_____________________________

MONEY Magazine: Best credit cards

For all the latest Five Tips columns, click here.

Gerri Willis is a personal finance editor for CNN Business News and the host for Open House. E-mail comments to 5tips@cnn.com.  Top of page


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