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Unless you are practically as perfect as Mary Poppins, you occasionally make silly mistakes like paying your credit card bill late. However, in today’s economic environment, as little as one late payment may be enough to raise card issuers’ eyebrows and thereby your interest rate.
The fall-out from the credit crisis shows little sign of letting up, and cardholders continue to navigate a minefield. Millions have already seen their credit card interest rates increased or card limits slashed, even cardholders who always pay on time. Credit card companies are much more trigger-happy than in the past, and these days, making that little slip-up and paying late is like playing Russian roulette with your interest rate. One little misstep may be enough for your interest rate to jump to a whopping 24.99% or higher. If you carry a balance on your credit cards, this is something you just can’t afford.
The new credit card reform puts some curbs on card issuers’ ability to increase interest rates on existing balances. However, that part of the law does not step into effect until August of 2010. In the meantime, it’s more important than ever for cardholders carrying a balance on their account to take steps to avoid the bite of increasing interest rates. Here are 7 tips to prevent you from being targeted for interest rate increases.
1. Be religious about paying on time. Don’t just pay on time; pay your credit card two weeks or more ahead of time. If you carry a balance, this could even save you a little money in interest costs.
2. Synchronize your payment due dates. It’s much easier to miss a payment if you juggle multiple credit cards that all come due at different times of the month. Instead, call your card issuers and ask them to change the payment due date to a date of your choice, preferably right after you get your pay check.
3. Keep your risk profile low. Card issuers look for certain behavior patterns when targeting cardholders for interest rate increases. Cardholders with high balances and who pay only the minimum are viewed as more risky and therefore are more likely to get hit with tighter credit terms. Instead, be a model cardholder: Pay at least double the minimum due, keep balances below 30% of the card balance, and pay well ahead of the due date.
4. Watch out for automatic bill payments. Setting credit cards up for automatic payments each month may seem like a great way to avoid late payments, but it can backfire. If your card issuer performs one of their “periodic risk-mitigation reviews” and decides to increase the card’s interest rate, the minimum payment will also increase. If the automatic payment is set up for just the minimum due or a little more, it will no longer be enough to cover the full amount due, and the account will go into default. By the time you find out, the credit card interest rate will have gone through the roof, and you may have accumulated hundreds of dollars in interest charges.
5. Keep several back-up credit cards. Ideally, keep at least three to four credit cards, so you have other options should your card issuer change your terms for the worse.
6. Read your statement. Each month, study your credit card bill for changes to credit limits or to the APR charged on new purchases or outstanding balances. If you pay online, pull up a copy of your statement each month and check the terms.
7. Call your card issuer. If despite your best efforts, your interest rate is still increased, call your credit card company to ask for a lower rate. Customer service representatives often have override capability to changes in terms, particularly for cardholders with a high credit score who pay their account on time. If you don’t have success with the first person, call back and try later or ask to speak to a supervisor.
A final note: As the last year has demonstrated all too clearly, relying on credit cards in case of unemployment or financial hardship is like walking a tightrope from the Empire State building without a safety net. Credit card companies continue to increase interest rates and shut down credit card accounts altogether. If you have no back-up other than your credit cards, you could easily be left with no recourse should your cardholder cut your credit limit or close your account. In short, don’t get trapped by the false security of credit cards. Instead, begin putting a little aside each month towards an emergency cash fund, even if you have unpaid credit card debt. Should you one day become unemployed, you’ll be glad you did.
