Melina paid one credit-card bill late. She tucked the bill in her purse around Thanksgiving but forgot to mail it, then sent it about a month later when she needed to use that purse again. She mailed the bill in, paying more than five times the minimum amount due.
She was worried about the card's interest rate rising because the issuer had that as a penalty for late payments but believed she could sweet-talk her way out of it. She was prepared for a late charge — figured she owed it — and thought that would probably be the end of it.
It went better than even the thirtysomething schoolteacher from Montclair, N.J., expected with her card issuer. Because she had no late payments in the relatively short time she had the card, representatives reset the interest rate and waived the late fee.
And that was the end of the story, until Melina's other bills arrived.
"One of my other credit-card bills came, and it had a rate of about 20 percent," she wrote. "I figured they made a mistake and called, but they said they had raised my rate because I had made a late payment on another account. Can they do that?"
They sure can.
It's called "universal default," it's one of the conditions I get asked about most often by readers and it's part of the fine print in many credit-card agreements. The basics of universal default are simple: If you're more than 30 days late on a payment to anyone, the interest rate on any card with a universal default clause can take a flying leap.
Effectively, card issuers with a universal default are reviewing your credit report to see if you are filing late. But that's not all: Because the terms are based on what the issuer might find in your credit report, you can trigger a universal default by missing mortgage, utility or car payments, carrying too much debt, using over half of your credit limit for most of your credit cards, and more.
And there is no denying that more people are getting caught in this trap because card issuers are moving towards the feature — despite some states such as New York taking steps to prohibit it — and consumers are increasingly late on payments.
The American Bankers Association announced this week that late payments for most types of consumer loans were on the rise during the third quarter of 2006. Experts attached a lot of excuses for the problem — higher interest rates, energy prices and more — but late payments in the eight main types of installment loans increased, so that 2.17 percent of all accounts had delinquencies.
Think timely, not big
While it might seem obvious that someone delinquent on a loan has bigger problems to worry about than the effects of a universal default clause, experts suggest that many consumers who are on the verge of this type of financial trouble bring the problem on themselves.
In some respects, credit-impaired consumers tend to feel like customers of a loan shark. They may not want to make a payment until the last possible moment, but they feel like they need to make a big payment in order to keep the creditor from breaking their fingers or legs.
Melina's credit-card issuer was not nice — waiving the late fee and restoring the interest rate — because she made a big payment; they respected that she hadn't been late before.
When in doubt, pay the minimum, but get it in on time. Big payments don't impress lenders; timely payments do.
But if you find yourself constantly paying that minimum, recognize that you are falling towards the group that makes up those delinquency statistics. Likewise, statistics show that Americans put an estimated $51 billion worth of fast food onto their credit and debit cards in 2006, roughly 30 percent of all money spent in quick-service restaurants. According to Visa, the average credit ticket in a fast-food restaurant was $11.15.
Fast-food retailers know that consumers will spend more on plastic than with cash, and they are racing to make it so that every outlet is now card-friendly. In a world of universal default clauses, complicated credit deals where teaser-rate offers get paid first and ordinary spending carries bigger rates and gets paid last, about the last thing most consumers need to do is put their Whopper or Big Mac on the credit card.
While convenience is a wonderful thing, it comes at a price; you're not getting much of a value meal if you're buying it on credit, paying it off slowly or, worse, finding out that your card has been hit with a universal default and your interest rates have skyrocketed.
The moral of the story is clear: Know the rules of your cards, because you're living with them whether you like it or not.
If you have not gone through the most recent update to terms — the little booklets of fine print that your credit issuers send every time they unilaterally change terms on you — and don't wish to strain your eyes reading the fine print of your original offers (if you can find them in your files), call your credit issuers directly.
Ask after the terms of your credit deal: How quickly do they report information — particularly late payments — to credit agencies? Does an ordinary, missed-it-by-two-days late payment trigger any punitive rates — and contact with credit bureaus — or does it take the more extraordinary 30-day blunder? Learn about grace periods, check to see how interest rates are applied to your balance, and where they go in the event you're late.
Don't wait for something to go wrong and wonder how the card issuers "get away with" treating you a certain way. Instead, find out how they plan to treat you now and avoid surprises.
What you are likely to learn, after a brief talk with representatives of your credit cards, is that you'd do just about anything to avoid having these problems; you'll be scared enough that, just maybe, you'll make on-time payments your priority.
Copyright (c) 2006 MarketWatch, Inc.