How to Avoid Credit Card Penalties

by John Stevenson on December 8, 2010

Nobody is immune to mistakes when making credit card payments. These include delaying payment, paying with insufficient funds (much like bounced checks), and exceeding your credit limit. What you may not be aware of is that the penalty rates charged by credit card companies can exceed 30 per cent. Annual percentage rates can double and even triple the normal rates. In the United States, for example, the average default rate is 27.88 per cent. There is a possibility that credit card issuers will face tighter regulations on implementing these rates, but in any case, it is better to avoid them. The results of a recent survey show that a client who borrowed $5,000 on a credit card and was charged the average default rate, while paying $150 each month, would end up paying more than $9,726 in total. This is $3,468 more in comparison to a loan at the average national annual percentage rate for new card offers, which stands at 13.16 per cent. 

This somewhat oversimplifies the situation as not all default rates are equal. Let’s take a look at the HSBC, which is pretty much the biggest bank in the world with branches in almost every single country. This banking institution charges a penalty rate of 31.99 per cent. Bank representatives comment that default rates are necessarily set at that level to keep the establishment competitive. Their main value is keeping shareholders happy, apparently. Too bad for the rest of us mortals who are not NSBC shareholders.

Credit unions are at the other end of the table. By law, they are prohibited from charging more than 18 per cent default rates per annum. Thus, the Navy Federal Credit Union is a popular provider with a penalty rate of 17.90 per cent, which is the lowest amount found in the survey. Then, there are establishments, which do not charge penalty rates at all. These companies cater to persons with bad credit, also referred to as sub-prime customers. An example of such an establishment is the New Millennium Bank. It is known for giving its clients a second chance as opposed to taking advantage of their situation with default rates.

Spokeswoman of Consumer Action Linda Sherry explains that a rate increase due to one late payment is not so harsh on customers, provided they are given a reasonable period of time to pay. However, many credit card issuers impose penalty rates even if the client is only one day late. The problem with that situation is that the majority of credit providers will not tell customers how they can get back to paying at a lower rate.

So, what are the ways to avoid credit card penalties apart from being selective when it comes to choosing an issuer? Simply put, do not make late payments, do not go over the limit, and do not pay with inadequate funds. Late payments are the worst mistake you can make. A payment is considered late when it has not arrived by the due time and date. Always be on time when sending money, whether electronically or by regular mail.

Another no-no is approaching the limit of your credit line. This can affect your credit utilization ratio adversely. The ratio relates to the amount of credit available to that which is in use. The closer this comes to 1:1, the lower your credit score becomes. If you go over your limit, the lender immediately starts charging penalty rates.

Finally, banks are quick to punish clients who make payments from accounts with insufficient funds. Take care that you do not do this.

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