* When you carry a balance
* When you do not carry a balance
* Just for having the card (i.e., an annual fee)
* For going over your limit
* For paying late
When you do pay late, they penalize you in two ways—through a flat late fee or by increasing your annual percentage rate (APR).
Universal default clause
But credit card issuers can penalize you in a third, less well-known way—through the universal default clause. And the kicker is that this penalty may have nothing to do with the company that imposes it. You may incur the penalty because you made a late payment on another credit card, a mortgage, or even a gas bill.
A universal default clause allows a creditor to reserve the right to increase your interest rate if you make a late payment to another creditor. Creditors find out about these defaults because they have the right to monitor your credit report. Banks can do this monthly, quarterly, or annually.
Why are creditors allowed to do this?
Creditors reason that your late payment to another creditor could mean that you'll also be late on your payment to them. They figure that you are a bigger credit risk because you may have too much debt. And if you pose more of a risk to them, they will increase your APR. The more late payments you have, the more reason there is to check on you. And check on you they likely will.
What can you do?
It is estimated that one-third to almost one-half of credit cards carry a universal clause, depending on whose statistics you read. The good news is that you can take certain steps to lessen the chance that a universal default clause will be invoked against you:
* Don't carry a card with a universal default policy or open a card account that has such a clause. To find out if the issuer has this policy, check the Other or Miscellaneous APRs section (or anything that discusses default pricing) of the updated agreement the credit card company sends you.
* Call the issuer directly and ask if it has this clause. Inquire what circumstances would cause your APR to increase.
* Know how much you owe to all your creditors and be aware of their late penalties so you can do your best to avoid them.
* Pay more than the minimum balance each month. If you ever need to negotiate with your credit card lender to reverse a universal default rate increase, it might help to have a record of making higher payments.
* Transfer balances from cards with universal default clauses to those that don't—or pay off these cards first. But be aware that canceling the card could adversely affect your credit score if it increases the percentage of debt to your available credit.
* Pay bills when they arrive, not just before they are due. If you use electronic payments, set them up so that they arrive a week before they're usually due, just to be safe.
* Get your credit report and credit or FICO score at least annually, and get them from all principal credit bureaus. Each bureau has access to different information, and sometimes your report can contain errors. Act quickly to dispute anything that looks erroneous. If a default clause gets triggered against you, it can be difficult and time-consuming to get it reversed.
* Call your lenders to negotiate a lower payment as soon as possible if you lose a job or are faced with catastrophic health bills that will affect your payments. Credit card companies would rather receive something than nothing. And, as we all know, financial setbacks can happen at any time.
Help may be on the way
There is some good news. One or two of the national credit card issuers have ended their universal default practices—they have other ways of maximizing revenue from cardholders. In addition, Congress and some state legislatures are starting to look into the universal default clause and are considering legislation to prevent it. Still, until that happens, your best defenses are to avoid late payments and to be aware of the penalties for them.
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