Primary marketMortgage Debt Can Boost Credit Card Rates
Before you sign for that mortgage, whether it"s a purchase mortgage, refinance or equity loan, read the small print -- the small print on your credit card agreements.
A not well known clause in your credit card agreement allows the issuer to quickly raise your interest rate if the issuer believes you"ve become a riskier customer, say, because you"ve taken out an equity loan and increased your indebtedness.
You are probably familiar with the clause if you"ve been late, missed payments or melted down your credit card by going over the limit and suffered penalties and perhaps higher interest rates.
Same clause.
And it"s just one more reason to dump those already higher interest rate credit cards.
With today"s low interest rates, the clause could really sock it to borrowers looking to lower credit costs, say with refinanced cash-out mortgages or equity loans.
If you don"t use the cash out or equity loan to pay off those credit card debts, your frugal efforts could backfire when a credit card company raises your interest rate as high as 20 percent or more.
It"s all right there in your credit card agreement. You know, that thin brochure full of small print that you probably didn"t read.
"These "universal default clauses" are a minefield for consumers. It"s tricky because the criteria for raising interest rates can be so broad," said consumer advocate Gerri Detweiler, founder of Ultimate Credit Solutions Inc. in Sarasota, Florida and the new CreditTraps.com.
More than 30 percent of major card issuers will raise your rate because of actions on other credit accounts -- even if the credit card account getting the higher rate has a perfect payment history, according to Consumer Action"s "Consumer Action’s 2003 Credit Card Survey, " which scrutinized 143 cards from 47 banks.
"Every year we uncover more anti-consumer practices in the industry," said Linda Sherry, Consumer Action"s editorial director.
"So many of these policies seem greedy and short-sighted. If you look at them as a whole—tiny minimum monthly payments, outrageous late fees and significantly higher penalty rates—they seem designed to drive cardholders into bankruptcy," Sherry added.
Credit card issuers argue that when credit card holders take on more debt that increases their risk and higher rates are warranted.
The provision built into most credit-card agreements that allows card companies to reset anyone"s interest rate based on the size and status of his other debts, along with technological improvements in information technology, have prompted credit card companies to check their customers" data more frequently -- not just when the creditor is reviewing applications or monitoring missed payments.
"The thing is you don"t know until you do it what the effect will be," said Detweiler.
There"s often little time to react.
U.S. Rep. Carolyn B. Maloney, (D-NY) would like to see credit card issuers give users a 90-day notice before they change the Annual Percentage Rate (APR). Right now, once a consumer is notified, the next charge could come with the higher interest rate.
"This problem is especially compounded since many people have automatic monthly charges on their cards these days for everything from their health club fees to their rent," Maloney said.
"This bill will give them the chance to transfer their balances and these automatic charges to another card, if they so desire," she said.
Meanwhile, it"s up to consumers to read the small print on credit card agreement statements to be aware of what could trigger higher interest rates. Also read your billing statement every month to keep abreast of the current rate you are paying.
Also, consider paying off the cards and or switching to cheaper, more stable home equity credit.
Detweiler and others offers additional tips to help keep your credit interest rates steady and borrowing costs down.
Monitor your credit report or subscribe to a credit report monitoring service to attempt to catch changes and mistakes on your credit report quickly. You or the service should check your reports with all credit reporting agencies at least once a year and before taking out large loans, including mortgages.
"A consumer should examine their credit card rates every month, just as they do with their monthly charges," says Stephen Richard Levine, with Franzel Mortgage Consultants in Westlake Village, CA.
Keep debt low, avoid opening multiple new accounts and, contrary to previous advice, don"t close out old accounts.
Detweiler says creditors don"t count open accounts with zero-balances against you. If you close them, you shorten your credit history and raise your outstanding balance-to-available credit ratio and those factors can count against you.
Pay bills early to avoid an accidental late payment, a late fee, and a subsequent hike in your interest rate.
Check your statement carefully after you sign up for an automated bill-paying service.
"I"ve received complaints from consumers that the first bill wasn"t processed quickly, so it was considered late. Then every subsequent bill was also considered behind," said Detweiler.
"The other trap is that some bills have due dates that float by a few days every month. So if you sign up for bill pay and list the bill as due on the 15th, the next month it could be due on the 12th and you could be counted as late," she added.
Levine says after receiving notification of a rate hike consumers should also:
Demand a dump all credit information contained in the issuer"s file.
Ask for a copy of the disclosure authorizing the rate change.
Demand a partition of the charges, pre-change charges to continue at the originally agreed-upon rate and new charges to be charged at the new rate.
Immediately consider transfering the balance to another card with a lower rate.