Default interest rates – the penalty rates charged when you are late on your payment – are usually two or three times higher than your normal interest rates. The current national average default rate stands at 27.88% and the average default rate by borrowers is 28.99%, according to CreditCards.com. Although credit card reforms are tightening the rules on how quickly issuers can implement their fees and default rates, delinquency is still something that should be avoided at all costs.
At today's average penalty rate, someone who borrowed $5,000 on a credit card and consistently paid $150 per month could wind up paying about $9,726 to pay off that debt. That's $3,468 more than would be required at the current average national APR for new card offers, which is currently 13.16%.
Credit Unions currently have some of the country’s lowest default rates. Their default rates are comparatively low because of laws governing lending by credit unions. The Federal Credit Union Act caps credit union APRs at 15%; however, the National Credit Union Administration is permitted to periodically review this rate every 18 months to determine if it should be higher. NCUA is currently allowing credit unions to charge no more than 18% APR.
There are also issuers that work with cardholders with bad credit – subprime borrowers – who don't charge any penalty APRs. That doesn't mean cardholders who slip up get a pass. Most of these creditors charge fees for late payments and exceeding your credit limit.
New Legislation
Under the new laws that took effect this month, banks are finding it tougher to raise interest rates when borrowers screw up. The Credit CARD Act says that cardholders will need to be a full 60 days late with a payment before they can be penalized by an issuer. Additionally, the CARD Act requires banks to review any rate increases at least every six months.
Avoiding Defaulting
Borrowers need to avoid the errors that activate default pricing. Luckily, these default rate triggers are easily identifiable.
- Delinquency. Avoid making late payments. A credit card payment may be considered late if it isn't received by the due date and time, so make sure to be prompt when sending your money either by regular mail or electronically.
- Going over the limit. Nearing the limit on your credit line can impact your credit utilization ratio – the ratio of credit available to credit in use – thus lowering your credit score. Exceeding the limit, meanwhile, can result in penalty APR and potentially a fee to go along with it.
- Paying with insufficient funds. Banks frown on payment from an account with insufficient funds. They will penalize you for it.
As banks struggle to make money in a challenging economy and regulatory environment, it's a bad time for cardholders to slip up. Though the new legislation is in effect, you must still tread carefully and be on top of your payment deadlines.
If you have credit card debt with high interest rates or other unsecured debts, the National Debt Relief Group can help with a free consultation. You can fill out our Short Application and one of our debt specialists will contact you within minutes, or you can call now – (888) 703-4948.
www.nationalrelief.com