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Many of us who carry balances on credit cards feel confident that we have our finances under control. We limit our charges to basic necessities (and the occasional extravagance), and we keep up with our monthly payments. Perhaps we even add an extra $20 or $50 to the minimum due in order to gradually pay down our principal. We are confident that we are being responsible consumers, and our confidence would appear to be well placed - after all, we are playing by the rules. However, what most of us don't realize is that we are sitting on a financial time bomb which threatens to explode at any time, wrecking sheer havoc with our finances. This hidden menace is often buried deep with the fine print of our credit card user agreements, and this hazard is deceptively simple and insidious. Worse yet, millions of consumers have fallen prey to this very trap in recent years. What is this hidden menace? Simply a clause that allows many credit card companies to raise interest rates almost at will. A recent New York Times article detailed the case of an Arizona man who had accumulated almost $70,000 in credit card debt over a five year period. With an interest rate of around 9%, the man was able to keep up with his payments and was even slowly paying down his debt. Then, without warning, his credit card company doubled his interest rate to 18%, causing his minimum payments to almost double to near $900 a month as well. That is a huge additional monthly burden, especially when it comes completely without warning. Unfortunately, this man is not alone. Many credit card customers with large balances have been subjected to unexpected increases in their card interest rates. Bear in mind that many of these people have not been penalized due to late credit card payments or the like. Instead these people have been good customers of the credit card companies. Ideal customers, even. They have been staying current with their payments, including paying already substantial monthly interest. But instead of rewarding these, their best customers, credit card companies have been increasingly surprising them with increases in interest well beyond any increase in the prime rate. What is the reason for this phenomenon? According to the Times, it is a practice called "universal default", in which credit card the companies raise interest rates of customers they deem to be increased risks of defaulting on their loans. Anything from a late utility bill payment to a high credit card balance can trigger these higher rates. That's right, if your balance gets "too high", they can double your rates because they fear you will be unable to repay your debt. The logic might seem a little shaky, but that's how the credit card companies think. So you are sitting on a time bomb. What can you do to diffuse it? Well, you can shift your debt to a secured loan like a home equity loan (bearing in mind that "secured" means your house is put up as collateral). You could also consolidate your debt on a personal line of credit, assuming your credit rating allows you to secure a reasonable interest rate. But perhaps the best solution for many is simply to stop spending and start paying off your debts. It really can be that simple. Find ways to cut back. Everybody can cut some of their monthly expenditures. Maybe for you it means getting a cheaper cable TV package or talking less on your cell phone. Whatever your situation, find some ways to cut back and use the savings to start paying down your credit card debt immediately. If you find yourself procrastinating, remind yourself, the time bomb is ticking. Scott Miller is editor of Get Me Out of Debt!, a free guide to credit card bankruptcy alternatives , which offers information on debt management programs and counseling.
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