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The Greenwich millionaire and other reverse stories

National Mortgage Professional
Jun 23, 2005

The world of credit: Universal defaultJohn J. Hudockinterest rate, credit score, credit card The "universal default" clause is the practice that allows credit card banks to raise your interest rate automatically, even if you have made your credit card payments on time but have made late payments on other accounts such as a credit card, mortgage, utility or car. Or, the bank can raise your rate simply because they feel you reflect too much debt. Many times, the decision is based on your credit score. Universal default is increasingly becoming a standard clause in all credit card agreements. According to many credit card executives, the logic behind universal default is that the bank is not being unreasonable in raising rates when it has reason to believe that the risk of being repaid by the customer has increased. Using FICO, credit card banks can now easily track your everyday financial activities and monitor your credit score. Your credit score, or FICO score, has become a vital statistic for many Americans and can be widely shared. It is used to determine how much you can borrow, how much you pay for your mortgage or life insurance, if you can rent a home and, as already noted, it is a factor in determining the interest rate you pay on a credit card. The three credit reporting companies and FICO work for the lending institutions. They collect information on you and your spending habits, and you receive a credit score from FICO ranging from 300 to 850. Having a FICO score of less than 640 can make it very difficult for you to get more credit at any decent interest rate. Deadbeats, according to this industry, are those who pay off their credit card debt every month; their FICO score is likely to be near 800. As far as the industry is concerned, these are deadbeats because the only profit that can be made on them is from the transaction fee charged by the creditor on any purchase. Unfortunately, most consumers do not know what their credit score is, how it's computed and what it's used for. FICO states that your credit score is usually determined by five factors, with the most important being the amount you currently owe and your payment history on large debts. This is together with the number of revolving accounts, how long since you last used these accounts and the number of credit inquiries. In 1996, the U.S. Supreme Court removed the existing restrictions on late penalty fees in Smiley vs. Citibank. Then, the fees ran to $5 or $10, and usually did not exceed $15. After this decision, all credit card banks took immediate advantage and fees soared, reaching upwards of $40. Since then, the amount of revenue the companies generate from fees (including late charges, over-the-limit fees, and charges for returned checks) has doubled. One of the lawyers who worked on the Smiley case predicted that penalty fees could rise to $50. Credit cards banks also have a specific time of day cutoff on your account. There is no limit on the amount a credit card company can charge a cardholder for being even an hour late with a payment. Usually the card company will allow you a reversal if you notify them immediately. Most people do not read the fine print on contracts, especially on credit card agreements. Even consumer advocates admit that they fail to read their own contracts, and credit card agreements are difficult to understand. In the fine print is a clause that allows the company to change your interest rate at any time, for any reason, as long as they give you 15 days notice. I believe that most consumers do not pay the necessary attention to their credit card accounts. About 37 million Americans pay only the minimum required--about two percent of their balance each month. By paying the minimum, it could take years to clear your debt and you will end up paying far more than your initial charges. Many of these 37 million cardholders could pay much more than the minimum and could even pay off their full balance within months, which would increase their credit score. Consumers are not educated about this practice, which keeps the credit card business very profitable. Today there is no federal limit on the interest rate a credit card company can charge. I have seen fees as high as 87 percent. The return address on your statement will probably indicate your credit card issuer is located in a state such as Delaware or South Dakota. That's because these are the states that have either poor or no "usury laws," meaning there is no cap on the interest rate that is charged. The federal government once had national usury laws that set a cap on the amount of interest that could be charged on a loan. But after the Great Depression, it repealed them and some states did not put new usury laws in place. That's why Citibank, the issuer of MasterCard, moved to South Dakota where there is no limit on interest rates. Misuse of credit cards is one of the major reasons why credit scores are low. This factor can cause your mortgage interest rates to be high or it may be the reason why your credit score is too low to get a mortgage. Be sensible; educate your clients not to use credit cards for credit. Credit cards should be used only for convenience. You must have discipline; when you charge an item, you must have the resources to pay off the balance within 30-60 days or realize that the item will cost many time the original cost. If you only make the minimum requested payment, usually two percent with card rates near 20 percent, the balance will never be paid off. John Hudock is president of The International Credit Club and The World of Credit, two companies specializing in credit report problems and scores. He can be reached at (570) 829-5696 or e-mail woc@epix.net. John invites e-mails on any credit topic. He will answer each one and publish any that will benefit his readers. Please be specific with your questions.
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