Special Report: Credit Crisis
Paul Mason of Wilmington thought he had a great interest rate on his credit card.
"It was 9.9 fixed, that was in December," Mason said.
But come January…
"They raised the rate. It was 9.9 and went all the way up to 25 percent," Mason said.
The reason: one late payment. Not on his credit card, but on his truck loan.
"They saw that one discrepancy, and they raised my percentage over 14 percent over the next month. I was shocked," Mason said.
It's happening more than ever before, credit card holders hit with higher interest rates when they've paid other bills late such as a mortgage, phone bill, or even a water bill.
It's called ‘universal default,’ and consumer groups are outraged.
"It’s a tremendous frustration for consumers and it's one they can't necessarily protect themselves against," Dierdre Cummings said.
The universal default clause is usually written on the back of credit card applications.
One states "all APR’s, (or interest rates), may increase if you... fail to make a payment to us, or any other creditor…"
Many applications now come with a blanket statement, such as "we reserve the right to change your APR at any time, for any reason... "
"It's just an unfair practice," Cummings said.
Look how it can change the amount you pay. Say you charge $2,000 on your card. At 9.9 percent, if you pay $50 each month, it will take 49 months, or about 4 years, to pay off. Total paid with interest: $2,450.
Now that same $2000, at 25.9 percent. If you pay $50 each month, it will take 7 and 1/2 years to pay off. Total amount paid with interest: $4,550 -- $2,000 dollars more than the 9.9 percent rate.
"Credit cards are the riskiest types of loans that banks make," American Bankers Association Senior Federal Counsel Nessa Feddis said.
The banking industry says credit cards are open-ended loans, with no collateral attached. So credit issuers boost interest rates on customers who seem to have trouble paying creditors back.
"Somebody who does not manage their finances well is going to pay more for credit," Feddis said.
Now, Congress is threatening to crackdown on credit companies.
"You should be notified and be given an opportunity to explain and to be told it's going to happen after a certain date, instead of waking up one day and, boom, it's happened, all of a sudden your paying exuberant rates," Congressman Mike Capuano (D) of Somerville said.
Consumer experts say you should pay all bills ten days in advance, and if you must use overnight mail, make sure they deliver to a P.O. box.
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