Credit Card Rate Hikes: No one Wins

Tucson, AZOne of the worst types of credit card rate hike is a practice known as universal default. Unfortunately, it's a practice that very few people know about until they're the victims of it.

Under universal default a credit card issuer can increase the interest on your card if you are late making a payment on any of a number of bills including mortgages, utilities, and other credit cards. They can also increase your interest rate if you carry too much debt or apply for further credit cards or loans.

Usually, the increase in your interest rate is a large one. Some people's interest rates jump from 2.9 percent up to 30 percent because of one late payment. And don't think that making regular payments for years will keep you in the credit issuer's good books. You can make regular payments on time for years, but if you're late once they can increase your interest rate without a second thought.

Unfortunately, the end result is that a lot of people wind up unable to pay their credit card bills and ultimately declare bankruptcy.

Take the case of Andrea Smith (not her real name): Despite having made regular payments on her credit cards for years, when she was late one evening making her credit card payment, the interest rates on all her credit cards skyrocketed.

"I wasn't even a day late, really. I paid the bill in the evening on the day it was due, but because we are three hours behind, it was registered as being paid the next day," Andrea says.

The interest rates on all her credit cards jumped from between 1.9 and 2.9 percent to between 29 and 34.9 percent. "I was paying my bills on time, all the time," Andrea says. "But I was late with that one card and everything went up. I went from being able to pay them off slowly, to not even being able to pay the interest on my cards. My minimum payment was at least $900 per card. They said it was because I was a bad debt."

Andrea phoned the credit card companies to try to work out a payment plan, but says they would not change their terms. "The funny thing is that nobody wins in this. If they had worked with me, they would have gotten their money. They were getting their money all along. Now, I had to declare bankruptcy and they got no more money from me. How does anyone win in that situation? Declaring bankruptcy is embarrassing and humiliating. But that's what I had to do. I don't understand how they think this is a good idea. Even my bankruptcy lawyer says that everyone is losing in these situations."

The truth is that with these ever-increasing interest rates, late fees, and other rate hikes, consumers are being dug into a hole, and it's not entirely their fault. As long as credit card issuers notify consumers of rate hikes, even in the fine print in extremely complicated language, they can do almost anything they want.

Make sure you know each of your credit accounts: know whether they have universal default clauses, what your credit limit is, and what the penalties will be for going over-limit or committing other credit card sins. Know when each payment is due and pay it a couple of days early. Make sure you fully understand balance transfers. There can be extra fees associated with balance transfers hidden in the fine print and those extra fees can add up.

If at all possible, pay more than the minimum balance on your credit cards. That will help you to pay them off much more quickly and will result in paying less interest on your cards.