Make no mistake and your rate can still spike

Make no mistake and your rate can still spike »Play Video
Better be careful -- there's a new trap that can catch even the best credit card customers.

You pay on time and stay within your limit, and your rate can still spike. How can that possibly happen?

Credit card companies are always coming up with new ways to make money. Slip up and they'll bump up your interest rate. But the latest gotcha takes the cake.

Make companies now put language in their contracts that gives them the right to change your interest rate whenever they feel like it.

That's the key finding in a report released Wednesday by a Consumer Action, a consumer advocacy group.

Consumer Action surveyed 22 major financial institutions including household names like American Express, Bank of America and Capital One. The survey takers posed as customers looking for basic information.

Seventeen out of 22 lenders - that's 77 percent - said they reserve the right to increase a card holder's interest rate at any time and for any reason.

"They are in a difficult economic market. Consumers are in a difficult economic market. It's just going to get ugly out there," said Linda Sherry, co-author of the report.

Sherry says even if you don't do anything bad, the credit card company can change your rate.

"And they're changing it a lot for this kind of nebulous reason called market conditions, economic conditions. What that basically means, to me, is they're losing money so they are going to make it up from the card holder's hide," she said.

Remember, if your rate goes up, you pay more on new purchase and your existing balance. Even if you close your account, you have to pay off the balance at the new, higher rate.

"The sad thing about it is it leaves the card holder with absolutely no idea of what they're going to pay for a balance they've already created," Sherry said.

"So if you already have a $10,000 balance, for instance, and you get that balance at 10 percent and then suddenly you're going to have to pay 30 percent for that balance, that's a big hit on your monthly budget."

It's not easy to avoid an "anytime, any reason" rate hike. Consumer Action found most of the top ten card issuers now have that provision in their contracts.

Credit card companies already have lots of other reasons to boost your interest rate to what they call the "default rate," the highest rate they charge. These include a drop in your credit score, late payments to another company, too many credit cards or too many inquiries on your credit report.

The Consumer Action survey found the highest default interest rate now averages nearly 28 percent.

At some banks, if you land in default-rate purgatory, there's no getting out. But some card issuers will consider reducing your rate if you keep up a good payment history for six months to a year. But this is not automatic. You have to ask for an account review.

More Information:

Consumer Action Credit Card Study