Hidden deep in the fine print of most credit card applications is a number so obscene, its hard to believe it exists. The number I speak of is the default rate, and if you are slapped (or perhaps, punched and kicked) with this interest rate, paying back your credit card can become a nearly impossible task.
Before we get into the NC-17 rates, we’ll first look at a few ways a person could end up in credit card default hell. The standard line, as taken from a Chase credit card application, goes as follows:
“Your APRs may increase if you default on this account for any of the following reasons: We do not receive at least the minimum payment due by the date and time due; you exceed your credit line, if applicable; or you make a payment to us that is not honored by your bank. Your APRs may increase as of the first day of the billing cycle in which the default occurs. We may consider the following factors to determine the default rate: the length of time your account has been open; the existence, seriousness and timing of defaults; other indications of your account usage and performance; and information about your other relationships with us, any of our related companies or from consumer credit reports.” Source: https://www.firstusa.com/cgi-bin/webcgi/webserve.cgi?page_type=appterms&card=C9YH
In a nutshell, the disclaimer above states that if you miss a payment, you can have your interest rate raised to what is often the highest rate allowed by law. As of April 2nd 2009, here are the default rates for major issuers:
Chase: Default APR up to 29.99%
CitiBank: Default APR 29.99%
Discover: Default APR 29.99%
And I guess you get the picture. If you are in danger of credit card default, you must act as quickly as possible to avoid it. Using a credit card calculator at the FTC, I learned that a person with a $5,000 credit limit paying a 29.99% interest rate will need 12 years to pay off their debt if they only make the minimum payment, and the total interest will add up to $4900. Essentially, you’re looking at a doubling of debt very quickly.
While banks and credit card companies have been loath to help consumers, often doing everything they can to push them into default, if you get hit with a default rate, you should try to contact your credit card company and work out a payment plan. You could also try transferring your balance to a new card. However, you may not get approved for a balance transfer if your default account has been reported to a credit agency.
A third option is to contact a credit counseling service. This can be a dicey proposition, as there are both good and bad companies in this arena. Because of this, we do not recommend any particular credit counseling service. However, we do have a few tips on companies to avoid. For instance, any company that offers to get your debt reduced should be considered dicey. For the most part, a good credit counselor will work with your creditors to get your interest rates lowered substantially. This can help you save thousands on interest without wiping out your credit score.
Ultimately, falling into credit card default can be a nightmare that can take years to unwind. However, it is possible to pull oneself out of this whole with quick, decisive action.
April 16th, 2009 at 10:05 am
I failed to make a payment on month (simply over looked it) on one of my credit cards. I have been with this company 12 YEARS without missing any payment. They not only defaulted me and pushed the interest to 34% (yes, 34) but they closed the card and want me to pay $630/month instead of the minimum of $296. They are not willing to work with me and I can’t afford the $630 on top of everything else. I am seriously considering Chapter 13 to stop all the fees, interest and hassle.
April 17th, 2009 at 9:30 am
Christina,
If you act quickly, you may be able to transfer your balance to a new credit card with a lower rate. However, once the bank reports you as being late to the credit bureaus, your credit score will probably drop dramatically, which will make it all but impossible to do a balance transfer.
I’m really sorry to hear that this has happened to you, and am outraged that your interest rate is 34%. If you get a chance, please let us know what company is charging this rate.
I really wish you the best of luck and hope you can find a way to avoid bankruptcy. Bankruptcy can really wreak havoc on your life for essentially a decade, so if you can’t refinance with a balance transfer, you may want to consider a credit counseling firm. These firms work with your credit card companies to lower your rates and set up a repayment plan you can afford. Unfortunately, I do not know enough about these companies to make a recommendation. However, I do know that you should avoid any company that promises to cut your debt by X percent, as these companies are dubious at best.
I know there are Christian credit counselors that operate as non-profits and do not charge fees. This may be a good option.
Once again, I am truly sorry for what happened to you and wish you all the best.
June 2nd, 2009 at 11:05 am
I have credit cards with both Citi Bank and Chase bank who are both charging me upwards of 30% every month. One of them actually closed my card because the minimum payments they were charging me did not cover any of my principle balance and it kept rising without my knowledge. Now I’m overlimit, they’re charging me as much as they possibly can, and I feel like I can’t do anything about it. Because my husband and I are self-employed it’s very difficult for us to get any sort of loan or credit. We want our earnings to look small to Uncle Sam and huge to the bank. I hesitate to try to transfer the balance as I realize it will affect my credit if it’s checked and I still may not get the card because of our situation. What can I do?
June 2nd, 2009 at 11:14 am
The damage applying for a new credit card is generally minimal, with most estimates of around negative five points. However, if approved, the new credit limit should reduce your credit utilization ratio (i.e. the amount of available credit you are using) and that can actually improve your credit score.
Furthermore, unless you are planning on buying house in the next few months, the small potential credit score decrease should not deter you from seeking a fair interest rate. At 30%, your debt will be doubling very quickly, and getting out of that debt will cost you a lot more than a few points on your credit score.
July 15th, 2009 at 11:27 am
I recently complained to Chase about my credit card account (formerly a WAMU card) being charged a $39 late fee even though the payment was debited from my bank account 2 days BEFORE my payment was due. They told me that since the payment was not processed until the day after my due date, they would not reverse the charge. I told them I would take my business elsewhere.
The same day, I accessed my account online and they added a “change in policy” statement and edited my previous statement (there are literally 2 statements for the same billing period)to put my account in default and raised my interest rate to 19%, and more than doubled my minimum payment in order to lock me in.
Can they do that? I know they can raise my interest rate, but it seems that they did whatever they could to prevent my ability to transfer my balance. This all happened yesterday. Do you think I can still transfer my balance, or is it too late?
July 15th, 2009 at 12:55 pm
I would definitely try to get approved for a new balance transfer credit card with a low rate as soon as possible, as they could list your account as past due on your credit report. As to this being legal, I honestly don’t know. As to this being fair, clearly it is not.
Also, many people are tempted to close their old accounts out of spite. However, this act can damage your credit score. Your best bet is to transfer your balance and leave the old card open so as not to negatively impact your credit score.