Hidden clause allows credit card companies to raise your rate suddenly

by Robert K Heady
Banking Columnist
Sun-Sentinel

It happens today more than you think. You've been paying your credit card bill on time, but suddenly, without notice, the card company raises your interest rate of 4 or 9 percent to as high as 29.99 percent.

"What happened?" you ask yourself. "What did I do wrong?"
Answer: You've just been caught in the universal default trap.

It's a term familiar to lenders and credit counseling agencies, but only now being faced by consumers more than ever before. Universal default is one of those tiny, flyspeck-size items buried in your credit card agreement -- stuff that the average Joe always overlooks. In a nutshell, even if you have excellent credit and a high credit score, if you slip up in making a payment to another creditor, such as your phone or electric bill, the card issuer has the right to jack up your card rate. That's why more of them are going over credit reports with a fine-tooth comb.

"It can be very costly if it makes it on to your credit report," says Paul Richard, executive director of the Institute of Financial Education (ICFE) in San Diego. "It's much more than a $30 or $40 late payment fee, because not only does it trigger higher fees and interest charges, it will also lower credit scores." Richard gets phone calls every day from "distressed consumers complaining the interest rates on their credit cards have shot up, without explanation or notice from their lenders. They all want to know why and what they can do about it."

One couple, Bill and Skye, got a call from their hospital, wondering why it hadn't been paid. Meanwhile, their card rate jumped from 9 to 19 percent. The fault, as it turned out, lay with their insurance company, which hadn't settled with the hospital. Richard advised the couple to visit the hospital, get the charge reversed, close their account with the insurer, and write letters of dispute to all three major credit bureaus.

"Once you get on their file, it's hard to get it undone," he adds. "Plus, if you apply for new credit, it could cause big problems." Universal default has been around for a couple of years, mostly involving subprime borrowers who have less than stellar credit, "but today more lenders are afraid they won't get their money back." With universal default language written into any loan agreement, all it takes is one late payment to any creditor to have high, ugly rates kick in. And that even goes for those "zero-percent-interest-for-the-life-of-the-loan" deals.

"Prevention is easy," according to ICFE's Richard. "Pay all your monthly obligations at least a week or more ahead of the payment due date. Many lenders and service suppliers, such as utilities, place reminder notices in or on their customers' monthly statements. They encourage consumers to have payments reach their offices not on the due dates, but in time to have the payment processed and posted to their account before the due date."

But "fixing it is not so easy," he continued. "Once a negative hits a credit report, the damage is done. To get it removed, a consumer must convince the creditor the problems lie elsewhere and that the consumer is not at fault because a payment was late. Usually consumers lose this argument, unless they send their payments by certified mail and can track the date of receipt. Without this proof, you'll be paying higher interest rates and other fees, perhaps for years to come," Richard says.

Remember, accurate and timely information can't be removed from your credit report even if you've paid off a once-delinquent account. The fact you did pay it off is to your credit, but the information remains on your credit files for up to seven years.

As for those credit repair outfits that entice you with promises they can "erase your bad credit -- 100 percent guaranteed," the truth is, says the Federal Trade Commission, "they can't deliver on their promises and claims. Many credit repair companies simply vanish with the consumer's money."

For openers, visit ICFE's Web site at http://financial-education-icfe.org, phone Paul Richard personally at 619-239-1401, or write him at P.O. Box 34070, San Diego, CA 92163. Robert K. Heady is the founding publisher of Bank Rate Monitor. You can write to him in care of the South Florida Sun-Sentinel or send e-mail to jrnl8888@aol.com.