A Surprising Credit Card Risk Almost Nobody Knows About

Detail of "Credit cards" by Lotus Head via Wikimedia Commons under Creative Commons Licence 3.0Do you remember “universal default?”  Prior to the Credit CARD Act of 2009, there was a nasty clause in most credit card agreements that, in effect, gave the credit card lender the ability to raise the interest rate on what they lent you at the drop of a hat.  Here’s how it worked: let’s say that you had a credit card that carried a balance.  Then, let’s say you made a late payment on your phone bill.  The language in your credit card agreement allowed the credit company to raise the rate on your credit card, even though you may have a perfect payment history with them.  The excuse for this is that, by being late on another bill, it raises the likelihood that you will be late on your credit card bill.

Well, yeah, if you suddenly increase the payment on the credit card bill, many families (which live paycheck to paycheck) won’t be able to pay the bill.  It’s quite the self-fulfilling prophecy.

I’m sure there are a few of you saying, “Well, they shouldn’t have been living paycheck to paycheck, so it serves them right.  Humbug!”  To which I respond: imagine if that there were four credit cards each with outstanding balances or $3,ooo.  Make the interest move from 15% to 27%, and you start to rally ramp up the costs.  Do that to enough people, and there will be plenty of financially crushed families littering the landscape.

Happily, according to the Whitehouse.gov Factsheet, the Credit CARD Act of 2009 “Bans Retroactive Rate Increases: Bans rate increases on existing balances due to ‘any time, any reason’ or ‘universal default’ and severely restricts retroactive rate increases due to late payment.”  There is one little hitch, though.  It doesn’t stop the credit card company from cancelling your card.  That’s right, here’s an example from consumerist.com.  So, the snake of universal default may be de-fanged, but it’s certainly not dead.

As far as I’m concerned, it’s just another reason not to do business with a credit card lender, unless you can pay off your balance at any given moment.  And maybe not even then.

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