Citi led the default pack with its charge-off rate reaching 10.21%.  Wells Fargo came in a close second, with a 10.03% charge-off rate.  Other large issuers, including Chase and Discover, reported default rates in the low 8% range, slightly below the current 8.9% unemployment rate.

While this is obviously bad news for the banks, it is really bad news for consumers.  As credit card companies try to cope with excessive loan losses, credit availability may decrease even more than currently depressed levels.

Additionally, consumers looking for 0% credit cards are likely to find these offers more difficult to come by.  By now, you’ve probably noticed the absence of these offers in your mailbox.  Soon, they may no longer be available online.  As we’ve reported here, a number of companies have reduced 0% introductory periods substantially, with most companies now offering 0% rates that only last for 6 months, half the 12 month average 0% period of just a few months ago.

One particular concern to Smart Balance Transfers is a decrease in the length of 0% rates and the increase in fees related to balance transfer credit cards.  Bank of America will be raising balance transfer fees to 4% in June, while certain Discover credit cards are already charging this fee.

Ultimately, consumers who have yet to take advantage of a 0% APR balance transfer to reduce their debt are likely to stuck paying higher interest rates for the foreseeable future as banks become more and more reluctant to lend money in general, let alone with no interest.

Unfortunately, there really is no light at the end of the tunnel here.  The credit card landscape continues to change dramatically with each change more and more unfavorable to consumers.

Sources:  http://www.reuters.com/article/GCA-Economy/idUSTRE54E4Y020090515

So, were the late Johnny Cochran, former lawyer for O.J. Simpson, alive today, I’m pretty sure he’d say something like this:  IF YOU ARE LATE, YOU WILL PAY THE DEFAULT RATE.

Yes, its cheesy.  But hopefully its catchy enough to keep you paying your credit bill on time.  And if that won’t do it, maybe the unfortunate story of a recent visitor named Cliff will persuade you:

“…Had a death in the family this month at the beginning of the month.Was out of town a week & when I got back,I realized that i forgot to mail a (credit card) payment out. I paid quickly by phone,but was about 13 days late. I paid what they asked, April’s bill & Mays bill, plus the $39.00 late charge,plus interest.  Bottom line seamed high at the time,but i paid to try & stay in good standings.When I got my next bill,they had raised my limit from 8.9% to 29.9 %.I called & tried to get them to bend a little,but they wouldn’t.I would transfer to other cards,but can’t at this time (Editor’s Note:  The reason Cliff cannot get a balance transfer is because he has credit score issues caused by a change of address related late payment).  What should I do to get the rates down.Thanks,Cliff.”

In the past, the solution for Cliff would be easy.  Call the credit card company, ask for a supervisor, and repeat until they reduce the interest rate.  Last year, this would be no problem.  Today, Cliff is facing an uphill battle.  His crime:  going to a funeral.

Now, as much as I’d like to vent about how unfair default rates are, every credit cardholder has agreed to these terms.  Many overlook these clauses.  But they are in every credit card contract.  And as a believer in both the law and personal responsibility, it is every credit cardholders’ obligation to make timely payments.  Is it fair?  Ethically, I don’t think so.  But fair is not the issue.  And banks that issue credit cards are not your friends.

So, without further ado, here are some easy steps you can take to avoid getting hit with credit card default rates:

1. If you don’t have online payments set up, do it now. 
2. The minute your credit card bill comes in the mail, go online and pay it.  If you’re on this website, you can get online.  So please, pay your bill promptly the day it arrives.
3. Pay your credit card bill before every other bill you have.  Your cable company won’t charge you 30% interest if you’re a few days late.  And utility companies won’t shut your water, power, or heat off for being a day late either.  Your credit card company, on the other hand, will raise your rates immediately.  They will do this because you’ve given them the okay, whether you know it or not.
4. Don’t pay your credit card with rubber money.  You bounce a check, they raise your rates.  And, while I think overdraft fees are absurd, if you have to choose between overdrafting your bank account and paying a $29 fee or overdrafting on your credit card bill and getting a $29 and a doubling on your interest rate, choose wisely.
5. Consolidate your credit card debt onto as few cards as possible.  Many of us juggle three, five or even ten credit card bills.  If you can get a 0% balance transfer (and, for the time being, you still can) transfer your balances onto a card with a low rate and eliminate some of the bills.  The less bills, the less likely you are to miss one of your payments (you can compare and apply for balance transfer credit cards here.)

Now, I apologize for taking such a harsh tone.  And if you got the impression I approve of these credit card practices, I apologize for being unclear.  Ultimately, the point of this rant is to help as many consumers as possible avoid the situation that Cliff is now in.  Based on what he shared, I think its safe to say that he’s no different than the rest of us.  He’s a guy that made an honest mistake that many of our friends and family members make every day.

Unfortunately, credit card companies don’t care about any of us.  And while there’s nothing we can do to help Cliff out, I think he’s the type of guy who would take some solace in the fact that his story may have helped other people avoid credit card default.

So let’s all do Cliff a favor and pay our credit cards on time.

In this Citi offer, the language was plain and simple.  Here’s what they wrote:

If you default under any card agreement you have with us because (of the following)…all of your APRs will automatically increase to the default

1. (You) do not make the minimum payment when due
2. (You) go over the credit line
3. (You) make a payment to us that is not honored (i.e. a bounced check)

These were the terms.  Plain and simple.  They are the exact terms that have always been in play.  However, you used to need monocles to read them.  Such is not the case with at least Citi today.  They are spelling things out plainly.

Yes, accidents do happen.  A payment might be late because you were on vacation, a check might bounce because a deposit didn’t clear.  In the past, it was much easier to get a credit card company to overlooked these mistakes.  Today, if any credit card company can charge you the default rate, they will.  However, at least Citi is making the rules a little clearer, and I applaud them for this step in the right direction.

Recently, I’ve been struggling to find a safe credit card company to recommend to visitors of this site, as so many companies have been really sticking it to consumers.  Late Friday, well past the time a reasonable person should be investigating the credit card market, I stumbled upon the realization that Citi was becoming a good company.  And the fact that they are clearly laying out the terms that can trigger credit card default rates is further proof to me that they are the first company enacting truly fair credit card practices.

For more information about Citi credit cards, please see the 0% balance transfer credit card  comparison section of this website, where you can view offers and apply online.

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.