If you’re among the growing throng of financially beleaguered Americans, here is a great way to save money. No need to buy the newest novel from your favorite suspense novel author or take your date to the latest hot thriller to hit movie theaters.
For blood-curdling, breath-stopping suspense, simply curl up in your couch with a copy of the latest fine-print letter from your credit card company announcing changes to your credit card terms. If you are fond of flirting with cardiac arrest, you’re in for the ride of your life.
This is what happened to this writer a few days back, when sitting down to read up on the numerous notices of new credit card terms, which these days land in consumers’ mail boxes at the same incessant rate as did 0% APR balance transfer offers in the past.
My Amex Blue card as of October 1, 2009, I learned, is subject to the following new rule: if any portion of the minimum amount due is not paid by the due date, the APR will revert to Prime plus 23.99% (currently 27.24 percent), “unless a higher rate applies.” In short, one late payment, and the account goes into a whopping default rate.
Finding this hard to believe, I called my friendly neighborhood Amex customer service rep in Bangalore, who confirmed that yes, indeed, the APR on my account would go into a default rate if just one payment was received late.
A letter from Discover card announced similar new rules for late payments, to be effective January 1, 2010. Other credit card issuers differed in whether or not they apply these new terms. A call to CitiCard confirmed that yes, if a payment arrives just one day late, the account will go into default. Chase informed me that while they recently did levy the default rate after one late payment, they “mostly” now only apply the default rate after two late payments. For my Bank of America business card, it would take two consecutive late payments to trigger the default rate. In short, in the brave new world of credit cards, for several of the major card issuers, it appears to be one strike and you’re out.
But wait, the new CARD Act was meant to prevent credit card companies from changing interest rates and other terms willy-nilly. The law, in particular, tried to limit hair-trigger defaults, in which a minor infraction leads to a disproportionate punishment for the consumer. What gives?
Are the new, more stringent rules for late payments a temporary phenomenon? Will things change after the new Credit CARD Act steps into effect on February 22, 2010? Once the new law becomes effective, card issuers can no longer increase interest rates on existing balances, and they have to give 45 days notice of rate hikes on new transactions. So, presumably, cardholders should be out of the woods then.
Not necessarily. Here is the fine print of a letter from Discover card under a section describing the new rules for the default rate, to be made effective as of January 1, 2010:
“We will no longer increase your APRs on your existing credit card balances if you pay late or exceed your credit limit. Your APRs on new transactions may increase to a Default Rate only if you fail to make a payment as due.”
In short, Discover can still put the account up to the account rate with one late payment if they so choose; the only difference is that they will apply the default rate to new transactions only. To comply with the new Credit CARD Act, Discover also states that
- it will send out a notice of default rate increases in advance;
- the cardholder will have the right to opt out of the rate increase and close the account;
- the default rate will not be charged to balances within the first year; and
- the default rate will be periodically reviewed.
If Discover’s letter is any indication of the future of credit cards; cardholders will have to live in a constant state of red alert going forward. Everyone makes mistakes, and who hasn’t had a late payment because of some silly mistake or oversight. If you regularly carry a balance on your credit card, that one late payment could be enough to trip you up and force you to choose between paying sky-high interest rates on future charges or closing your credit card account.
There are some silver linings. After the new Credit CARD Act steps into effect, the rate change cannot apply to existing balances unless your account is 60 days late. So if you have multiple credit cards, you can always stop just using the one with the default rate. Or, call your card issuers and tell them you won’t be using the card anymore unless they lower the rate back down. If you otherwise have a good payment history and a solid credit score, you’ll most likely find that the company will work with you rather than lose your business.
The bottom line is that going forward, cardholders who regularly carry a balance on their credit cards will need to be much more vigilant. Read those fine print letters from your credit card company, and keep an eye on your APR with each monthly statement. The credit card industry is in a state of flux, and you never know when card issuers are going to change the tables on you.
