Credit companies sometimes use other means to determine your interest rate than the current and past history you have with them. You could have paid all your bills on time the entire time you have used their card and they can still determine that it is time to raise your interest rate. How is this possible?
Something called Universal Default makes this possible. As part of the default clause in your contract with the credit card company, the company may have written in the concept of Universal Default. When you are in default you have failed to make your payments on time. For example, you may have a MasterCard that you fail to pay before the due date. The people at your Visa Company may have read your credit reports and discovered that you were late making your MasterCard payment. (Some companies make it part of their policy to regularly check your credit reports.) Because you defaulted on your MasterCard payment, Visa can decide to raise your interest rate even though you have not been late making your payments to them. This process is called Universal Default because your other companies act as if a default for one company is equivalent to a default for them all.
The unfortunate outcome of having your interest rate raised can be a lowering of your credit score. This is something you would like to avoid, but if it does happen, having late payments removed from your credit reports would improve your credit situation all around.
There are other activities that can also result in Universal Default. Going over a credit limit can trigger other companies to enforce their Universal Default policies. Having what companies consider “too much debt” can also be a reason listed to enforce Universal Default. Having used more than 50% of your credit limit, having taken out a new mortgage or a car loan can also be actions that cause companies to consider Universal Default. Carefully paying attention to how much debt you can take on and limiting it to a minimum can help prevent Universal Default from happening to you.
Another way that credit card companies determine how they will treat you by looking at something other than your personal history with them is through credit profiling. Even though you have a high credit score and pay your full amount due each month, your credit card company can lower your limit. The reason they will decide to do this is because of the stores you go to. If you have used their cards at a store where other people who have defaulted have shopped, your company can discriminate against you and lower your limit. Your record can be completely clean, but because you shop where those who failed to pay their bills have shopped, you are penalized. This is credit profiling. American Express has been known to employ this policy.
Credit profiling can be employed over issues other than just the stores you go to. Companies such as American Express consider the mortgage lenders you engage. Those mortgage lenders, for example, who have several defaulted mortgages on their books, would be one type of lender that credit card companies may be wary of and lower your limit even if you have not missed a payment. Living in an area where the housing prices are falling is another trigger for credit profiling. This particular instance is not under your control, but if you are in an area where prices are falling, you may pay the price for it with a lowering of your credit limit.
There are reasons that a credit card company may raise your interest rate and lower your credit limit by your own actions. At the same time, what other people around you are doing can also cause the same effect. Being vigilant can help to lessen these negative consequences of being associated with those who have defaulted on their payments.
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