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 S. 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
"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," notes Richard.
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 financial-education-icfe.org,
phone Paul S. Richard personally at (619) 239-1401, or write him at
P.O. Box 34070, San Diego, CA 92163.
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More Information Please Contact:
Paul S. Richard, ICFE Executive Director