Credit card default rates are an important part of the credit industry. Many people do not realize they could be paying a much higher interest rate on their credit cards should the default rate go into effect. It is critical for individuals to understand what this means.
About Credit Card Default Rates
The credit card default rate is the interest rate charged to the borrower when he or she violates the terms and conditions of the credit card agreement. This rate is also known as a penalty rate. In some cases, the rate can top 30 percent. The penalty rate may go into effect in various situations, but is most commonly associated with:
- The borrower submitting late payments
- The borrower missing payments month to month
- The credit card limit being breached
In general, the default rate will not go into effect just because the cardholder's credit score drops. Rather, the increase in the interest rate will be due to the borrower's violations of the specific card terms. Some companies go to the default rate after the borrower exhibits a long term pattern of poor credit usage. Other companies may do so after as little as one late payment.
Credit card companies must provide clear information regarding the default rate to the credit card holder. This information is available on each credit card statement, in the terms and services agreements provided and by contacting the company directly.
How the Credit CARD Act Affects the Default Rate
Prior to the Credit CARD Act, companies could begin charging the default rate at most any time. The interest rate could increase for almost any reason.The Act makes it harder for credit card companies to increase rates when borrowers make mistakes. In order for the company to increase the rate to the default rate, the borrower must be at least a full 60 days late with his or her payment.
The law requires credit card companies to revisit such rate increases six months later to determine if they are still necessary. If not, the company needs to put the rate back to what it was before. However, as of August of 2010, the Federal Reserve has yet to implement all the provisions of the law. Therefore, the actual legal requirements on lenders may change.
Nevertheless, this costly rate increase can still happen in instances of repeated consumer abuse or mismanagement. Take steps to avoid this increase, such as paying bills on time. It can save you money and help with your credit rating.
How to Avoid Rate Increases
Borrowers can reduce the likelihood of facing credit card default rates by simply making sound credit decisions. Consumers can easily prevent these increases in interest rates because lenders clearly define what can cause them.
- Avoid making late payments. This is the largest trigger of default rates. A missing or late credit card bill is not a good reason to miss a payment. Set up automatic payments electronically to avoid such circumstances.
- Avoid going over the limit. Borrowers should monitor their credit card activity regularly. Most can track spending in almost real time at the credit card company's website. Individuals may be able to make immediate payments online if they believe they are going to go over the limit.They can also opt out of overdrafts.
- Avoid using the credit card when the balance is close to the limit. Insufficient funds transactions, which are transactions in which the card is declined, can lead to the application of the default rate as well.
If you have been charged default rates already, contact the lender to find out how to reduce them. Sometimes all it takes is a phone call to get the rate back where it used to be.