One of the common practices of predatory lending is the awarding of a promotional rate that seems very attractive and drives people to use the financial product (often credit cards but also loans and lines of credit) and build debt. The promotional rate lasts only a limited period of time or till a late or missed payment is registered. When this happens, the interest rate increases immediately, generating unaffordable interests that worsen the debtor’s situation. This can have terrible consequences both on the finances and credit score of the applicant because as interests accumulate, the minimum payments grow (or the loan payments become all due immediately) making it impossible for the debtor to repay the amount owed. This generates further damage to the credit report as negative inputs keep getting recorded into the debtor’s credit history. Watch Out For The Triggers The main reason why escalating rates have such terrible consequences on people’s finances is that the results are not expected. Thus, people tend to spend money with credit cards or take loans without reading the fine print of the contracts thoroughly. This implies that they do not know which actions can trigger the rate escalation and so, they are continually at risk of an increase on the interest rate charged for financing credit card and loan balances. In order to justify such growth on the interest rate charged, lenders tend to include different delinquencies as causes for the increase. For instance, a late payment can easily double the rate for financing the unpaid balance and a missed payment can block further financing and triple the rate. Some creditors even make the whole debt immediately due when some of these delinquencies occur. Avoiding late payments or a missed payment is not always enough though. There are several other actions that can trigger the rise like spending more than the credit limit established. Moreover, there are certain credit card issuers that will trigger the rise by the mere pass of time. This is concealed as a promotional period on the credit card contract. After the six month or twelve month period has ended, the rate automatically rises and interests start accumulating. Getting Used To Financing The Balance With The Promotional Rate The greatest problem with this kind of products is that people get used to the promotional rate and do not contemplate the possibility of an increment on the rate. Thus, they keep spending and carrying balances from one month to the other and when the increase strikes, they are not prepared for the results. Interests build up adding up to the already high balance and sometimes even the minimum payments become unaffordable. The consequences can be catastrophic: accounts can be charged off and blocked, all payments can be set to be due immediately, penalty fees can be charged, credit score drops rapidly as negative inputs keep accumulating on the credit report, etc. That is why people need to be careful with escalating interest rates and pay special attention to the fine print of financial product’s contracts.
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