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Beware of the Credit Card Slow Boil

Credit Wise (featured column)
by Jennifer Wallis

There is an old story about a trusting frog who gets invited to soak in a nice warm hot tub. His hosts are smiling and oh so inviting. "Come on in! Relax! Doesn’t that warm water feel nice?" they ask. Well, what froggy doesn’t know is that they are slowly turning up the heat while he enjoys their hospitality. He isn’t a guest for dinner-he is dinner! By the time the poor naïve frog realizes what is going on, it's too late. Poor froggy is about to croak for the last time.

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Credit card companies can work in much the same way. When they deem you credit worthy, they will woo you like a lovesick sap. They will promise you cash back, low introductory interest rates and bonus miles. They have reward programs with wonderful gifts to thank you for your patronage. They will give you credit offer after credit offer and credit increases galore. You are their shining star. The golden child. You have charged things on the cards they gave you and they could not love you more.

But, you’ll soon find yourself in hot water if you actually use all of the credit they are giving you. At first they will increase your credit limit. You stop charging and start just paying it back. Then, you may start to look a little tarnished in their eyes. You now have maxed out your credit card and maybe a few others. Now, your credit score will suffer because you are too close to your credit limits. According to their sophisticated models that once said you were highly credit worthy, they start to see you as a higher risk. You now have too much debt. They start to doubt whether or not you can pay it all back. They may stop offering you new credit cards or offer you higher interest consolidation loans instead. Balance transfers offers that were once free now come with a fee. They are turning up the heat.

How can you tell if you are at risk to be dethroned from your credit worthy perch? Where did you go wrong? Is there anything you can do about it? Well, read on, my friend, because I think I can help.

How can you tell if you are becoming a “higher risk”?

If you owe balances on more than 3 credit cards, you may be considered a higher risk than you once were. If you have used more than 50% of your available credit on any card, they may see that as a red flag. If you once had a lot of free balance transfer offers but now you don’t have any or they come with a 3% fee, you may be headed for trouble. If they try to lower your credit limit or increase your interest, you will soon start to feel the heat. If you stop getting platinum card offers and start getting high interest offers, you are no longer in their good graces.

Where did you go wrong?

Make no mistake. No matter how cute their commercials may be, credit card companies are not in the business to be your friend. They want to make money and they want to make it off of you. Their ideal customer carries a balance on their credit card (but not too high of a balance that you start to look like you are having financial trouble).  That way you are paying interest. Their ideal customer pays the minimum payment on time every month. Their ideal customer continues to charge items. If you pay your account in full each month, pay late, get too close to your limit or stop charging altogether and just start paying down your balance, you become less than ideal.

Is there anything you can do about it?   

The truth is that your personal financial goals and the credit card companies goals are probably not the same in the long run. Our goal on this website is to help you get out of debt and make the best financial decisions for your life. The credit card company wants you to carry a balance so that you pay interest and they probably wouldn’t mind you paying some fees either. The conflict is inevitable.

If you get to the stage where you stop charging and just start paying off your debt, you may lose the credit card company as your best friend. Some will treat you better than others. I once had a credit card company tell me they were going to increase my interest rate. I called to find out why since I was paying more than the minimum and had never paid late (those are responsible things to do, right?). They told me that since I had stopped charging, it looked like I was just paying off my balance so they needed to increase my interest rate. However, I was paying attention. In the letter they sent me stating that they were going to raise my interest (from 8% to 18%) they gave me an out. If I did not agree with their decision, I could send them a letter saying that I did not want them to raise my interest rate. If I ever used the card again, they would raise the interest to 18%. I never used the card again and paid it off as soon as possible.

Other cards may allow you to keep your interest rate the same but require you to close the card. Sometimes, they may send that notice of their intent with your credit card statement. It may be in print so fine that you will need a magnifying glass to find it. It may also be written in legalese so that you have to read it very carefully to understand it.  It is important that you read any statement inserts and follow the instructions. They will usually require you to write a letter (phone calls will not preserve your rights) by a certain deadline. It is also a good idea to send it certified mail so you can prove that they received it. Too often, people don’t read these notices so they miss the deadline to complain about it. Then their interest rates go sky high without them even knowing they could have stopped it.

Beware of Universal Default

Most credit card companies participate in something called universal default. It usually says so on the back of your credit card statement and the contract you signed when you received the card. It means that if you ever pay any credit card late or go over your credit limit, you default under the terms of your credit card agreement and every other credit card agreement. This gives them a right to increase your interest rate, lower your credit limit or close your account. Credit card companies will often review your credit report to see how you are paying your other credit cards. For example, if Bank of America reviews your credit report and notices a late payment on your Citibank card, they may quickly raise your interest even if you did not pay your Bank of America card late at all. Sometimes the default rate is 30% or more. The best way to avoid this pitfall is to always keep your balance well below your limit and always pay your bill a few days early. If you know you are going to be late, it is best to call the credit card company right away. They may offer a one-time courtesy fee waiver or keep you in good standing.

You may also find that certain credit card companies are more forgiving than others. I tend to remember who kicked me when I was down and who was kind enough to help me out of the mess that I created. The helpful ones are cards that I have kept and the others get cut into tiny pieces. Now that my credit is back in good shape, it is fun to get a credit card offer promising me the moon from one of those unforgiving companies. Then, I quickly shred it. They won’t get me back to soak in their hot tub for anything in the world.

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Copyright © 2007 by Jennifer Wallis. All rights reserved.

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