How to escape universal default

Eraser rubbing out the word

A few late payments, or any number of other financial sins, have prompted your credit card company to throw you into universal default.

Now you're paying what, 24% annual interest on your credit card debt? Or is it more like 28% or even over 30%? Your minimum monthly payments have doubled or tripled and you're in a bind.

It will require you to call and negotiate with your credit card company. Never an easy task.

Then let us help you get ready to call, ask the right questions and be prepared for what the customer service representative is likely to say.

Step 1. Get copies of your credit reports and fix any mistakes.

As a consumer, you're entitled to one free copy of your credit report a year from each of the three main credit-reporting agencies. You can get those reports from annualcreditreport.com. Take a close look and find out what they have on you, and what errors might be compounding your problems.

"It's not unheard of for people to find things like unpaid parking tickets entered as default judgments," says Dayana Yochim, personal finance advisor for Motley Fool, a personal-finance education firm. Even unpaid library fines have been known to show up on credit reports. "An insanely high percentage of people have mistakes on their credit reports," she said. "Make sure you know what it is."

Each of your histories from Equifax, Experian and TransUnion will tell you how to fix mistakes.

Step 2. Check your mail and our rate finder.

Even people with bad credit are constantly bombarded with offers for new cards. Many of these offers come with incentives. You're looking for one that offers a low balance-transfer rate. Zero is available, although you might not qualify for one of those. But one offering a 10% rate should be available to you.

Also check the rate finder on our credit card home page. You'll find hundreds of cards offering many different deals.

Step 3. Call your bank.

Use the customer service number on your statement to ask why you landed in default, and what you must do to get out and lower your interest rate.

It's not as crazy as it sounds. When banks are filling your mailbox with unsolicited offers for credit cards, they want your business pretty badly. And if they want your business, they should be willing to give a little to get it.

Tell them about any errors in your credit report and that they are being fixed. Tell them about any extenuating circumstances that caused you to miss a payment, such as moving, being hospitalized or dealing with a death in the family.

Be realistic. The bank probably won't agree to lower your interest rate right away. But it may be willing to do that if you make all of your payments, and make them on time, for the next six months.

Be persistent. If the customer service representative doesn't offer a plan like that, then propose it yourself.

Getting out from under a penalty rate "depends on so much," says Travis Plunkett, legislative director for the Consumer Federation of America, which tracks the credit industry. Among them are "your credit history, how bad your financial condition is, the willingness of the creditor to develop a workout plan," and the bank's ever changing policies.

Step 4. Threaten to walk.

If the customer service representative won't tell you anything except to "call back in six months,'' threaten to transfer your balance to another credit card company.

Tell the representative about the offer you have and see if that changes the conversation. Customer service representatives work from a script. Such a threat may be a cue to move to a new page with a different, more agreeable answer.

"Each new credit customer costs the bank $100 to $150 to get,'' Yochim says. "They don't want to lose you."

And even if your credit isn't the best, the interest you pay is the most profitable part of the credit card business.

This would all be a lot simpler if the credit card companies would openly discuss what customers must do to get out of universal default, or what they tell cardholders when they call.

But they won't.

When we asked National City, for example, a spokesman simply said: "That information is proprietary." Meaning, when pressed, "We don't talk about the details."

Citigroup is the largest issuer of credit cards, with 130 million customer accounts. Yet this is all spokesman Samuel Wang would say about its policy: "A Citi card customer can call us and inquire what offers and products are available to them. We work with each customer at their request at any time. But each situation will be specific."

Step 5. Walk the talk.

If your bank agrees to a plan to get you out of universal default, accept it and follow it. Scrupulously.

If your bank won't help, and wants to keep you in universal default for the rest of your life, transfer your balance to another credit card.

"Then throw the card under a major appliance," Yochim advises. "Or at least make no more charges."

Many credit cards also charge one, usually lower rate, for debt transferred to the card, and a second, usually higher rate, for new purchases.

Since payments are automatically credited against the debt carrying the lowest interest rate, new purchases go unpaid and accumulate interest at a higher rate, until you've totally paid off the transferred balance.

"Don't dig your hole any deeper," Yochim says. "Automate your payments. Get back on track."

But don't assume that universal default is something you must endure forever.

Because you don't.

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