As long as you adhere to the terms of your credit card and keep your card in good standing, you will benefit from the lower interest rates. Certain errors, however, can lead to the default rate, an interest that is more expensive to carry a balance and harder to pay off your credit card.
What is a credit card default interest?
The credit card default rate, better known as the penalty interest, is the highest interest charged by a creditor or lender, usually as a punishment for becoming delinquent on payments with 60 days or more, exceeding the credit limit, or the Have your credit card payment returned by your bank.
Credit card standard rates are usually around 29.99%. The financing cost would be $ 20.54 on a $ 1,000 credit to the average default rate. Compare that with the $ 10.27 financing costs you would pay on the same balance, but at a much lower 15% interest and you will see the more expensive the default rate can be.
If your credit card company raises your interest rate at the default rate, you can lower it in six months as long as you stick to your credit card terms. That means your payment is on time, within your credit limit, and always have enough money in your bank account to cover your credit card payment so that your payment is not returned.
Depending on your credit card terms, the speed can only go back down on your existing balance. Some creditors may still apply the higher rate for new purchases made after the penalty interest came into effect.
Three ways to prevent the default rate
It is not difficult to avoid the default rate on your credit card balance. Follow these basic rules and you can prevent your interest rate from increasing to the default rate.
- Make all your payments on time. If you are late for a payment, get caught up quickly because the default rate kicks in after you are 60 days delinquent, that is, two missed payments in a row.
- Stay below your credit limit. Although many credit card issuers have eliminated the over-the-limit fee, they have not eliminated the default rate trigger that happens when you charge more than your limit.
- Make sure you have enough money in your bank account to cover your payment. Checks that not only lead to a refund payment, but they also lead to the default rate.
Thanks to the Credit Card Act of 2009, there is no more universal standard when a creditor could increase your speed to the default rate just because you were late or across the border with another credit card.
Credit and Loan Industry Default Rate
Another type of default rate is used by the credit crisis and the loan industry to measure the number of credit card holders and loan borrowers who are late on payments. This default rate considers credit cards that have expired but have not yet been charged-off or bankrupt and mortgages and loans for cars that expire more than three months.
The standard rate can be used to measure the health of the economy. Rising default rates – more borrowers late on their credit card and loan payments – could mean that the economy is experiencing problems. High mortgage defaults mean an increase in evictions may be on the way.