The Default Clause
When you buy something how often do you use a credit card? A credit card with the "promise" of zero interest for so many months, or a low interest rate as long as you make your payments on time. But is it really that simple? No it is not.
Credit card companies are just plain nasty. They get you looking at the right hand while they are taking your money with the left hand. They offer a great interest rate promotion and wrap it up in a tiny package called small print that no one reads and if you do read it you can't understand what it says. This tiny of small print ends up costing you thousands of dollars in late fees, over-limit fees, transfer fees, more fees, fees on fees and so on. Let's keep in mind it is the interest rates and fees that makes the credit card companies money, YOUR money, because they are in the business to make money, not save you money on interest rates.
First and foremost, the best way to avoid "loosing in the game" they play is to not use credit cards. Pay cash. However, I know most people don't live that way so the next best step is education about what you are getting yourself into with these "zero interest gimmicks"
You must be aware of a little know "catch" to the promotion being offered called "The Default Clause", also know as a Universal Default Clause.
We all know if we are late with a payment on a credit card that has given us a zero or low interest rate for a period of time that we will be charge a late fee, and possibly lose that zero or low interest rate. But did you know that that some credit cards can raise your interest rate even if you are not on time with the issuing company? Yes, they can if they are using a default clause (which would be written in that tiny package called small print). They can legally raise your rate if you are late on any other credit card you have, regardless of what company issued you the card.
Okay, so you say, that's just a risk I will take. Or is it? They can raise your interest rate to 25 percent, possibly more if you make a late payment on a car loan, mortgage, or even your phone bill.
A universal default clause generally states that a creditor reserves the right to penalize you with an increased interest rate if you're late (in default) of your re-payment terms -- of a payment to any other creditor not just that of the issuing company. They justify this because, in theory, if are late with one creditor, you are a greater credit risk and are more likely to pay other debts, including the issuing card late.
Creditors also have the right to routinely monitor your credit file. So a creditor with a universal default clause will be watching, waiting - time is on their side. Remember, credit card companies are not your friend, there are in business to make money....Your money!
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.
But there is even more to worry about.
Under the universal default clause, your interest rates can be increased for many 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. Once you signed up for a credit card with a universal default clause, you gave the credit card company card financial monitoring power over you, and how you handle your money. (see why I say stay away from credit cards?)
This effects your financial future in a bad way. Let's look at this example. You're an American household, with $8,000 of credit card debt on a single card. Assuming you make no additional purchases on your card, you have a 9 percent interest rate, and you make the minimum monthly payment, it will take you 218 months (18 years) to pay off your debt and you'll end up paying roughly $4000 in interest. Credit card company wins...you loose.
Now let's assume that for whatever reason you were late one month with your car payment. You did what the credit card company banked on, defaulted on the deal. The late payment triggers the universal default clause with your credit card issuer, and now your penalty rate gets increased to 26 percent. It will now take you 679 months (56 years) to pay off your credit card debt, and get this -- you'll pay $30,813 in interest. Ouch!
What if you had three cards with a universal default clause..interest rates go up on all of them due to one late payment on your car.
So how do you avoid this little clause?
Well if you have been reading my blogs for any period of time you know what I am going to say about beating the universal default clause...."Don't use credit cards!"
However, since most of you probably already have credit cards, and some have the clause so here is some ideas to protect yourself.
1. Many cards have stopped using the universal default clause.
Read the fine print, you may be lucky to have a card that is not using this clause or has discontinued the clause (keep in mind they may have just discontinued the clause on new purchases and your old purchases may still be under the clause, tricky aren't they?)
2. If you know you have a card that has the clause.
Move your balance to a card that you know does not have the clause. Better yet, pay it off in full. Get a small loan to pay it off, just get the balance of that card and then close that account for good.
If you're unsure if the card has the clause, cause who can understand that fine print anyway, call the credit card company and ask what specific circumstances will affect your interest rate.
Use local credit union cards over national cards. They are easier to work with, and although they will still be tricky, they aren't as bad.
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 AnnualCreditReport.com to order your credit report and credit score today. You should make a practice of this every quarter with a different reporting bureau, this way you can make sure what is being reported is accurate.
4. Always pay your bills on time.
If you can't pay on time, chances are you are over extended and are not properly managing your money. Read Dave Ramsey's Total Money Makeover. Make a budget on paper so you can see exactly where your money is going, chances are you are you have plenty of money, you are just not managing it properly.
Avoid the universal default clause by not using credit cards. If you do, be careful to stay on top of your credit card agreements they can change at any time. Better yet, make a plan to become debt free and pay cash pay yourself not the credit card companies.