The following article is from MSN Money. I thought it was well worth sharing with our readers. The article points out the importance of paying attention to your credit card bills and doing the right things to keep a good credit score. – Doug Parker
Why your credit card rate just went up
By MSN Money staff
Banks are increasingly pouncing on cardholders with any kind of chink in their Credit report, a survey finds, with penalty rates of as much as 35%.
Imagine opening your Credit Card statement to find that your low, low rate has more than doubled, even though you’ve always paid your bills on time.
It happens, and it’s happening more and more frequently, says a consumer-watchdog group. Nearly half of banks surveyed by Consumer Action now penalize cardholders for changes in their credit history -- changes that can range from a late car payment to a mortgage inquiry -- with “universal default rates” of up to 35%.
Five years ago, the group says, almost no banks had such a policy.
The penalty makes carrying a card balance very, very expensive. The average card balance was $3,632 in 2004 (the last year for which figures were available), according to Carddata.com. The minimum payment -- typically 4% of the balance -- would be about $147 a month. Paying $147 a month, a cardholder with the average non-penalty rate of 12.61% would clear the debt in 29 months and pay $560 in interest. But at a penalty rate of 28%, you wouldn’t vanquish the debt for 38 months -- and you’d pay nearly $1,900 in interest.
"This is the only industry that re-prices something you have already paid for," said Linda Sherry of Consumer Action.
What trips their triggers
According to the Consumer Action survey, card issuers raised rates if any of the following occurred; the number that follows each item is the percentage of banks using such a trigger.
• Credit score gets worse: 90.48%
• Paying mortgage, car loan or other creditor late: 85.71%
• Going over credit limit: 57.14%
• Bouncing a payment check: 52.38%
• Too much debt: 42.86%
• Too much available credit: 33.33%
• Getting a new credit card: 33.33%
• Inquiring about a car loan or mortgage: 23.81%
Consumer Action’s yearly survey of the credit-card scene looked at 146 cards from 47 issuers. The group found default rates as high as 35% (Merrick Bank). Runners-up for the highest default rates are Citibank and Providian at 29.99%. The lowest default rate is 12% (Arkansas National Bank).
Some banks are willing to reduce the higher rates if cardholders’ credit histories improve, although not always to the original rate.
Opt out, lose the card
In many cases, the first time consumers learn of a rate increase is when they open their statements, because advance notice isn’t required. Several large banks such as Citibank, Chase and MBNA have announced their intentions to give cardholders advance notice of such interest-rate increases and allow cardholders to “opt out” of paying them. However, when consumers decline to accept the change, they lose use of the card.
“It’s nice to get a warning,” said Sherry, who coordinated the survey, “but for many folks, there is nothing they can do with the heads-up. They can’t afford to pay off the balance, and to transfer the balance to another credit card, they need a clean credit record.”
Sherry noted that people who reject the change of terms lose the use of their card, immediately or at the end of the expiration period, depending on the bank. “The opt-out protects you from the higher interest rate, but it’s unfair in any case to raise the interest rate on an existing balance.”
