Sunday, January 06, 2008
Factors That Trigger Credit Card Rate Hikes
Are credit card companies trying to scam you? On the one hand, they provide a valuable service that gives you the added convenience of being able to purchase items and services you need and sometimes don't need and to pay them off in a manner that best suits you.
On the other hand, some credit card issuers are trying to scam you and they do everything in their power - legal or otherwise to do it. Legal or not, many of the practices they follow are clearly unethical and unless you are a contract lawyer you couldn't determine how they planned on scamming you anyway because they hide everything in the countless pages of fine print that comes with every cardholder agreement.
According to Harvard Law Professor Elizabeth Warren, the credit card companies are misleading consumers and making up their own rules. "These guys have figured out the best way to compete is to put a smiley face in your commercials, a low introductory rate, and hire a team of MBAs to lay traps in the fine print."
The problem is that the industry is operating without fear of penalty. There's no regulator or customer who can bring this industry to task.
Deadbeat or Revolver
In the credit card industry there are two types of customers - the deadbeat and the revolver. Don't take this the wrong way but hopefully you're a deadbeat because in the lingo of the industry a deadbeat is someone who uses their credit cards the way they are suppose to.
As in they pay-off their balances each month and therefore incur no interest charges. No profit in that scenario and thus, if you pay-off your balances each month (about one-third of Americans do) then you should be proud to be called a deadbeat because you are using your credit cards wisely.
On the other hand, the majority of Americans are called "revolvers". A revolver is someone who carries over a balance and is considered to be "the sweet spot" of the banking industry. This "sweet spot" continues to expand as the average credit card debt among American households has grown to about $8,000 -- which is more than double what it was just ten years ago. This debt has helped generate record profits for the credit card industry in 2004, an estimated $30 billion before taxes.
The 0% Interest Offer
The game today is the "0% interest for 6 months" offer. Once again, this can be a legitimate and great deal if you know how to play the game ("deadbeat") but if you don't ("revolver") it will end up costing you more money in the long run because after the initial 6 months the rate will usually jump up to a much higher rate than the normal purchase rate.
Rate Hike Triggers
The industry provides many reasons to justify rate hikes and in all fairness, some are actually valid. However, many are not and are just flat-out deceptive. One Banking Association spokesman said that, "Because the credit card business is unsecured lending, the risks associated with the business must be offset."
Industry critics say that an ever growing share of the industry's revenues come from deceptive tactics. One example is how the "default" terms are spelled out in the fine print of the cardholder agreements. The terms and conditions can be changed at any time, for any reason with only a 15 day notice.
Here are just some of things that can trigger late fees, penalties or rate hikes.
If you don't pay your bill on time, the company seems quite justified in taking away your good rate. After all, you've broken the rules of your contract. The problem lies in the fact that penalty fees and rates are sometimes triggered by a single lapse or a payment that arrives just a few days, even a few hours late or a charge that exceeds the credit line by a few dollars or a loan from another creditor which renders the cardholder "overextended" as defined by the three all-powerful credit bureaus - Experian, Equifax and TransUnion.
In addition, the industry is raising interest rates, adding new fees and generating payment due dates on holidays and Sundays with their only motive being of tripping you up and hoping it will result in you making a payment late. The industry has become a very anti-consumer marketplace.
Spending on Other Cards
If you think that one card issuer doesn't know with whom and how much you spend on other cards then think again. As a result, if you exceed your credit limit or make a late payment on another card it can trigger what's called a "universal default clause" and result in higher rates on other cards - cards that you may have had for years and never had a late payment.
Defaulting on Non Credit Card Bills
Defaulting on any bill (utilities, cell phone, mortgage, etc) can trigger higher interest rates on your credit cards. Every bill you have is tracked by the 3 primary credit bureaus and with the emergence of technology your information is readily available to any card issuer. So if you default or pay late on anything, they'll spot it and it could result in higher rates on some or all of your credit cards.
Some experts say the profitability of credit cards began twenty-five years ago when the banking industry successfully eliminated a critical restriction: the limit on the interest rate a lender can charge a borrower. Deregulation, coupled with a revolution in technology that enables the almost real-time tracking of personal financial information and the emergence of nationwide banking, has facilitated the widening availability of credit cards across the economic spectrum. But for some, the cost of credit is often far greater than it appears.
If your rate is suddenly increased, the first thing you should do is cancel the card and move the balance somewhere else. If you can't do that for whatever reason, then contact your local consumer protection agency and if all else fails you may need to contact a lawyer.
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