Saturday, March 21, 2009

My interest rate is what?

Credit cards are great, right? They're convenient. Every store accepts them. Some cards even offer rewards, like free airplane tickets or cash back when you use them. If you have a solid credit score, you might even have a low interest rate. However, credit cards can be dangerous, especially if you have a late payment.

The Universal Default is a clause written in most credit card contracts that states if you are late on ANY payment to ANY creditor, you are subject to the default rate, which could be as high as 28%. Basically, that means if you are late on your car payment, you get the default rate. You might be saying, “What does my car payment have to do with my credit card payment? The correct answer should be nothing. But the credit card companies feel that if you are late on one payment, you are more likely to be late on another, and thus, a risky customer. And we all know what risky customers get - a higher interest rate.

Once you get the default rate, it’s tough to talk the credit card company back down to a lower rate. So, the goal should be to avoid being late. We’ve all been late or close to late on a bill at some point in our life. The phone bill got lost in the pile, or I forgot the due date was last week. Below you’ll find some tips to keep you on-time and out of the default interest rate.

Some tips to avoid being late:

  • Set up automatic payments from your checking account for all your bills – This is the best way to be sure all of your payments will be on time. Even if you never use your credit card, set it up to deduct the minimum monthly payment (if there is one) out of your checking account just in case. Paying the minimum isn’t going to put in a dent in the balance, but it will help you avoid being late.
  • Set up online billing for all your accounts – Online billing is fantastic. You don’t get paper bills that you have to shred. You can see your account balance at any time. And you can usually make payments at any time. This is faster than mailing a payment and you can be sure your payment gets to the company on time.
  • If you get paper bills, pay them when they come – Don’t wait until two days before the due date to mail the check to the cable company. Pay the bill when it arrives. I’m guilty of this and I agree it’s a tough habit to adopt, but one that could save you money by never being late.
  • Call your credit card companies and request a different due date – Most credit card companies will let you change your due date if you call. Some will even let you request a different due date online.
  • Keep an Excel Sheet of all your bills and mark them off as you pay them – This one is easy. All you have to do is start and Excel Document and make a list of all the bills you pay each month, along with the due date (amounts aren’t necessary). When you pay the bill, place a check mark next to that company.

The default rate is no joke. It won’t always raise your minimum monthly payment, but it will affect the balance you pay over the life of the loan. If you have a $1,000 balance on your credit card with an 8% interest rate, your minimum monthly payment is probably around $25. If you pay that every month, it will take you 97 months and $285 in interest to pay off that $1,000. If that same card goes to a 28% interest rate, it will take you 667 months and $9,173 in interest to pay off that same $1,000. Don't fall into this pattern - you'll end up paying way more than you should in the long run!

Mr. Thrifty

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