Recently, I received a notice in the mail advising that TD was making changes to their credit card accounts. Credit cards already come with some of the highest interest rates of any borrowing option, plus a wide array of late payment, cash advance and other special fees. You might wonder, how else can they increase your cost of borrowing?
Penalty Rates on Overdue Or Delinquent Credit Cards
You credit card company may charge you 19.99% interest on all outstanding balances. And that rate will hold as long as you make at least the minimum payment. But if you miss a payment, watch out, the cost of your credit card debt goes up.
Almost all credit card companies have what they call a penalty interest rate clause.
What are the consequences of making a late payment when you owe money on your credit card?
If you miss a minimum payment by more than 30 to 60 days, the penalty interest rate kicks in and this rate is significantly higher than the rate currently charged on your credit card – often driving up your rate of borrowing to 25-30%.
TD bank is raising interest charges on overdue accounts and dramatically increasing the period you have to live with the higher rates. I assume that the other banks and credit card companies will follow suit with similar penalty interest rate charges.
Let me briefly describe the change TD has announced and then explain the significance.
The old policy for people that missed their minimum payment by 30 days was to increase the customer’s interest rate by 5% and keep it there until the customer made 2 minimum payments on time in a row.
The new TD policy is to charge 24.99% interest on purchases and 27.99% interest on cash advances until the customer has made 12 consecutive minimum payments on the account.
The bank’s notice provides an example that uses a $2,500 balance and explains that the new charges will cost the customer an extra $8.47 per month. That doesn’t sound too bad, unless you owe more than $2,500 and you end up paying that extra amount for a very long time. Using the bank’s example, the extra interest over 12 months equals $101. If any payments are late during that year the 12 month clock starts ticking again.
If you owe $25,000 on your credit cards then is will cost you and extra $1,000 per year. That’s money that previously would have reduced your debt (and therefore interest charges).
The truly frustrating part of all of this is the fact that the banks can simply alter the terms of your credit card agreement whenever they want. In this case, they are dramatically increasing the costs for people in default – the people in the most need of some extra consideration and help.
If you owe money on your credit card, check your credit card terms and conditions to learn what rate you may be trapped into if you miss a payment or two.
Late payment penalty clauses are one more reason to develop a plan to deal with your debt.