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All Eyes Are on Your APR

You've carried the same credit card for more years than you can remember, have never been late with a payment, and have been granted numerous credit-line increases. You are the picture-perfect customer.

Too bad your bank doesn't see it that way.

In fact, loyal customers are increasingly getting lumped in with the bad credit crowd -- and the demotion often means disappearing perks. First, comes the letter: "Your patronage is deeply appreciated, but we're afraid we no longer hold you in high esteem." And then there's the fine print that reveals that the low interest rate that you brag about is no longer valid. You must now join the hoi polloi and pay out the wazoo to borrow money.

Why the sudden fall from grace? Allow me to introduce the banking industry's new best friend: the universal default clause. That's a legalese way of saying that a bank has the right to raise a customer's interest rate if that customer fouls up with another company. Such foul-ups make the credit reporting rounds faster than a rumor at an all-girl's high school.

Remember that doctor's bill that your insurance company dragged its feet paying? Recall the car loan you co-signed so your college kid would come back home and visit more frequently? Have a vague recollection of a stack of forgotten library books (and the accompanying fines) at the bottom of your trunk? It's all coming back to haunt you.

Nearly half of all lenders have the universal default clause written into their cardholder agreements. Only you probably overlooked the mini leaflet written in microscopic type in the acceptance envelope with all the deals for rental cars, hotels, and "Kittens in a Basket" porcelain figurines. When you signed the back of the card and activated the account, you agreed to these terms, like it or not.

That said, victims of the universal default clause have several avenues of recourse:

1. If you carry a balance, pay it off as quickly as possible and resolve to pay for your purchases in full every month from now on. When there's no revolving balance, the interest rate doesn't matter.

2. If you are unable to pay down your card soon, roll your balance over to a lower interest rate credit card. (See whether The Motley Fool Visa's 0% balance transfer option is competitive with other offers you see.) However, don't automatically close your old account, particularly if it is one of your older accounts. Mature accounts help establish a long credit history. Despite what you may have heard, closing accounts can actually hurt your credit score.

3. Investigate the rumors -- because they might not all be true. Surveys show that as many as 80% of credit reports contain errors. That might be a bit exaggerated, but if someone is bad-mouthing your bill-paying ways, it behooves you to set the record straight. If you have been denied credit, you can get a free report. And West Coasters can get a free credit report from the three major credit reporting agencies (Experian, Equifax and TransUnion) thanks to the Fair and Accurate Credit Transactions Act. (The rest of us have to wait until the rollout reaches our shores.) It's best to see what is on all three of your major credit reports so you can look at your borrowing potential under the same harsh lens the lending industry uses. Our partner True Credit offers a 3-in-1 credit report and credit score for $29, which is one of the best offers I've seen.

4. Wait it out. Most dings on your credit report will disappear after seven years. The good news is that it doesn't take that long for lenders to consider it old news. Your more recent good credit behavior weighs much more heavily in your favor than one blip a few years ago.

And, finally, keep your eye on the card dealers so you don't get slammed with any sneaky card tricks.


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