Credit card companies can charge a default APR if a borrower fails to make payments, but the rate is now capped at 35% APR. The universal default clause, which allowed all credit card lenders to charge the default APR, was abolished in 2010. Consumers can avoid the default rate by making on-time payments and keeping balances low. Commercial lenders may have more stringent rules.
The default APR or penalty is an interest rate that credit card companies may charge when a borrower fails to keep up with payments. Although this rate, as of recent changes in the law, cannot exceed 35% APR, this is still a large increase from what most people pay in credit card interest. Also, once a person has had a card that falls at the default APR, it can be difficult to change the rate unless payment habits improve. Some regions allow people to cancel their cards upon notification of a default fee, but this is not always the case.
Until 2010, credit card companies in the US were able to take advantage of a special loophole in the law called the universal default clause. Under this law, if a consumer didn’t pay the minimum payment on a credit card, all of their credit card lenders could respond by charging the default APR, even if they had no connection to the company the consumer defaulted with. This practice was especially prevalent in the second half of the early 2000s, and many people found themselves with multiple credit cards that carried extremely high interest amounts. In some cases, it became impossible not to default on most cards, because the minimum payments increased with higher interest rates.
In most regions, other credit card companies can no longer change the default APR unless a person specifically breaches a loan agreement with that company. For consumer lenders, default is typically defined as a 60-day late payment, although stricter definitions have existed in the past and may still apply in some regions. Additionally, the new interest rate charged can only be applied to new purchases, and most consumers can get out of the default rate if they make six consecutive months of on-time payments.
Still, it’s very important that people try to avoid any situation where a credit card lender might charge this fee. Avoidance, from one perspective, is simple. People must pay their minimum credit payment on time, not even a day late, or risk an interest rate increase to just over 23% plus the prime rate, not to exceed 35%. Negotiating with a lender about non-payment may also be enough to avoid the rate, but you can’t always count on this.
Default APR rules are different and more stringent for commercial lenders. The penalty APR may be applied to the entire balance. Also, there may be more circumstances where non-compliance occurs easily.
If business or consumer lenders are concerned about missing minimum payments, they should keep balances low so payments are correspondingly low. It’s not a bad idea to set aside a month or two of minimum payments to the maximum amount that could be owed on the credit card. This could help avoid missing a payment and the default APR.
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