 Credit
card offers 2 rates: teaser, torture
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 Dear
Debt Adviser,
I have a retail credit card with a $4,500 balance. I applied for
and was issued a bank card, which offered 2.99 percent for balance
transfers until paid in full. The default rate is 31.24 percent.
Can the card issuer increase my rate if I don't default? I don't
want to end up with a higher interest rate than what I have presently
with my retail card.
-- Debra
 Dear
Debra,
You have just made my day! For years I, along with a lot of financial
educators and gurus, have been begging people to read the fine print
and take more responsibility for their finances. And here you are,
living proof that the begging is starting to take hold.
Congratulations for reading the fine print on your
balance-transfer offer and understanding that your interest rate
could increase to 31.24 percent if you default. One other thing
you might look for in the fine print of the agreement is a sentence
or two describing a "universal
default" clause. About half of the cards have this provision,
and it can be very costly because it redefines what constitutes
a default.
Simply put, universal default is a clause that allows
a creditor to convert an account that is current and paid on time
to a default interest rate based on the default of any other account
held by that person. So, for example, you could be paying down your
$4,500 balance faithfully, never missing a payment and be unaware
that you have an unpaid medical bill that appears on your credit
report. Your new bank card sees the late notation on your credit
report, and bingo, converts your account to the 31.24-percent default
rate.
To add insult to injury, depending on the fine print in your agreement,
the creditor may also apply the universal default rate if it believes
that you represent a higher risk at some future date than you did
when you opened the account. This is often gauged by a decline in
your credit score.
So how do you avoid getting hit with the default interest rate
that you cannot afford?
- Look for a card that does not include a universal default clause.
- Look for a card that has a lower penalty rate if you actually
do default. The 30-percent-plus rates are not in use everywhere.
Credit unions, for example, usually have much lower default rates,
according to Bankrate surveys.
- Pay all obligations on time every month. I pay my bills electronically
a day early to ensure nothing is late.
- Understand what behavior drives your credit score, and act accordingly.
I have a new book out in the "Dummies" series that deals
with credit and credit repair that may be useful.
- Do not exceed the credit limit on any of your other credit cards.
In fact, try not to let your balances get over 50 percent of your
limits to minimize credit-score impact.
- Review a copy of your credit report regularly. You get three
free ones a year, so pull one every four months or so and
correct any errors or inconsistencies. I recommend springing for
the few extra bucks to get a FICO credit score with your free
report. A score is the three-number distilled version of your
report.
If you should trigger the default rate, be aware that it is very
difficult to get it changed back to the original interest rate.
Once you are seen as a riskier customer, the card issuer will want
to be compensated for that additional risk of default.
One last word of caution: Don't use that card for
new purchases until the transferred balance is paid off. Why? Because
chances are new purchases carry a much higher rate than the 2.99
percent and they will accrue finance charges from the day of purchase
because you are carrying a balance. Generally, payments will be
applied to the lower-interest-rate debt first, so until you pay
off the entire $4,500, all new purchases will revolve at a higher
interest rate, driving your total costs up.
Good luck!
The Debt Adviser, Steve Bucci, is the president
of Money Management International Financial Education Foundation
and the author of "Credit
Repair Kit for Dummies." Visit MMI
for additional debt advice or to ask a question of the Debt Adviser
go to the "Ask the
Experts" page and select "debt" as the topic.
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