Do you read every word in every piece of mail regarding every credit card account you own?
(Editor of a site called CreditCards.com nervously clears his throat, about to make a confession.)
I don’t either.
So despite being a Discover card owner, I didn’t notice until my colleage Jeremy Simon told me that Discover has raised its penalty (aka default) rate — the rate you pay when you misbehave by, in Discover’s case, missing two payments — to 30.99 percent.
Yikes. Let’s take a hypothetical situation, but one that’s not extreme. Let’s say you got a 0 percent card balance transfer card from Discover and transfered some debt to it.
And then, problems develop. Maybe you ran out of money because you broke your leg, or you got a divorce, or maybe you’re just more spacey than Paula Abdul on American Idol. Whatever the reason, you miss two payments while owing $2,200 (the median credit card debt, according to the Fed’s most recent report on the topic). Discover’s new policy, imposed May 1, is to raise your minimum payment to 4 percent, and to raise the rate from 0 to 30.99 percent.
According to our “The true cost of paying the minimum” calculator, your minimum payment jumps right away to $88 a month. If you continue to make that minimum payment, your $2,200 loan will take you 10 years and six months to pay off, and you’ll pay $3,258 in interest.
Borrowing $2,200 and paying $5,458? Being in debt more than 10 years? Lousy deal.
The lesson I draw? Don’t break your leg, for one. Find a way to build an emergency savings account. And when you comparison shop for credit cards, go beyond looking at teaser rates and rewards, and include looking at default rates. Because, sometimes, when you least expect it, Paula happens.