Avoid universal default at all costs

Payment due marked on calendar

Many credit cards have the right to raise your rates to painful heights if you miss a payment -- and not just payments to them -- or commit any number of other financial sins.

Just fall behind on your mortgage or a car loan. Pay your electric bill late. Bounce a check. Exceed your credit limit. Allow your credit rating to drop below what the credit card company considers an acceptable level or be deemed to be carrying too much debt.

Instead of paying 9% on your credit card debt, you're suddenly paying 24%, 28%, or more.

A 2005 study by Consumer Action, a non-profit education and advocacy group based in San Francisco, found that about half of all banks could impose "universal default" on their customers and the average penalty rate was 24.23%.

To find out if your credit card company has the right to impose universal default rates check the terms of your contract. Some companies tell customers about such penalties right on their monthly statement. Other credit card issuers provide that information in announcements sent with the bill or in separate mailings. You can also call your credit card company and ask.

While it is perfectly legal for them to do this, it is also perfectly legal -- and perhaps even sensible -- for you to find a credit card company that doesn't.

Citibank, one of the largest credit card issuers, is a good place to start. It surprised and delighted consumer advocates earlier this year by dropping the universal default provision on all its cards.

The alternative is making sure you don't do anything that will double, triple or even quadruple your interest rates.

According the Consumer Action survey, the two most common reasons for being thrown into default are falling credit scores and late payments to any creditor. Since being late will also lower your credit score, the first thing to focus on is not being late.

One way to avoid this is to set up automatic payments through your bank, usually through online banking. That way the bank sends out all your regular monthly checks. When you set it up, make sure you allow enough time for the payment to leave your account and make it to your creditor by the due date.

Don't forget to figure out when payment due dates fall on weekends, or to deduct the automatic withdrawals from your account. To help you out, some banks will send you free e-mail notifications every time money is deposited to or withdrawn from your account. Find out if yours does.

You can also authorize creditors to withdraw money from your bank account every month. Set it up for the amount required for the mortgage, car or other fixed-amount bills, and for the minimum payment required for your credit cards or other revolving accounts. You may also want to check whether they send a confirmation e-mail to remind you of the deduction.

If you don't have enough to cover your automatic payments, banks will charge you overdraft and other fees. However, these fees are usually lower than the penalty of long-term higher interest rates on your credit cards.

If at some point you don't have the money to make all the monthly payments, you can always stop the bank from making them. This could trigger the default rate, but you would be paying the default rate no matter how you missed or were late for the payment. By setting it up to take place automatically, you don't have to worry about making sure you send out the check in time.

With that taken care of, you will have more time to find credit card companies that treat you fairly, and enjoy the convenience without having to worry as much about the dark side of plastic.

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