Fine print, Living with credit, Protecting yourself

Ouch! Discover jacks penalty rate to 31%

Daniel Ray

Do you read every word in every piece of mail regarding every credit card account you own?

(Editor of a site called 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.

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  • scott

    I have had A Discover card for 19 years. One time I forgot and made my payment one day late. This was five years ago.Recently I called and asked for a little mercy from my 28% interest rate. I could tell there was tears streaming down the face of the account rep when she told me there was nothing she could do for me. I explained that she was going to cause me bankruptcy. At this point I think she lost her composure completely. At this point I no longer wanted to cause more grief and hung up on her.