Credit Card Companies Look for Any Excuse to Boost Rates

Question: I opened my credit card statement to find my 6.9% promotional rate had been unexpectedly jacked up to 22.49%. According to the fine print of my cardholder agreement, that can be done when I’ve made a late payment. But my payments to the company have been made on time. The only blemish on my credit report stems from a dispute with a book club. A surly phone representative at the credit card company told me that they also could raise my rate if I’d made a late payment to any other company, and that they periodically review my credit report looking for such delinquencies. Can they really do that?

Answer: Oh, yes.

Credit card companies try to boost their profits, and limit their losses, in a variety of ways. Typically, companies will increase interest rates for people who are late on their payments, reasoning that these folks are at greater risk of going broke.

But some people declare bankruptcy without ever being late with their credit card payments. The companies hope that by scrutinizing credit reports they can find people who have been late on other payments. That way, they can jack up the rates on those they deem higher risk.

Obviously, the smart thing to do would be to transfer your balance to a lower-rate card--if you can. Not all credit card issuers perform such periodic credit report checks, but enough do that you may have trouble getting a decent rate.

In any case, you’ll want to resolve that dispute with the book club, and pronto. It may be worth just giving in and paying the bill if you can get the club to remove the negative item from your credit report.

You may not think it’s fair that you can be held hostage this way, and you’re probably right. But the price of an unwanted book is small compared with the potential cost of higher interest rates.

If you learn anything from this experience, let it be that the best way to handle a credit card balance is to pay it off as soon as possible. You’re not as likely to be a profit center for a credit card company if you use your card as a convenience and pay your bill in full each month.

Borrowing Against 401(k) Plan a Bad Idea

Question: I’m 39 years old and just got fired from my job. I have $3,800 left on a loan I took out against my 401(k) plan. I don’t have the money to pay back the loan, but is there any way I can get out of paying the penalties on that outstanding balance under a hardship clause? If I get another job, can I just resume making payments? How long do I have to pay the $3,800 into my 401(k) account before I get hit with a tax bill from the IRS?

Answer: The answers to your questions are no, heck no and it depends.

You’ve discovered one of the big drawbacks of borrowing from your 401(k). If you lose your job for any reason, you must pay back the loan balance--sometimes immediately, usually within a few weeks--or pay penalties and income taxes on the balance.

You should contact your 401(k) plan administrator to find out when the balance is due. If you fail to follow your plan’s guidelines for paying back the money, you’ll be considered in default and the loan balance will be treated as a premature withdrawal.

The federal penalty for such withdrawals is 10% on your unpaid balance. You also may owe a state penalty (in California, that’s an additional 2.5%). The income tax you’ll owe depends on your tax bracket, but you easily could owe $1,700 or more in total penalties and taxes.

You also would be losing the future tax-deferred growth of that $3,800. If repaid into the plan, it could grow to more than $66,000 in 30 years, assuming a 10% annual return.

So you would be smart to make every effort to find the money to pay back the loan, and soon. Maybe you own a second car, a stamp collection or some stocks held in a taxable account that could be sold.

If not, this may be one of those rare situations where you could be smart to borrow money even though you don’t have a job. If you set up a home equity line of credit before losing your job, you could tap it now to pay back the 401(k) loan. If that’s not the case, perhaps a friend or parent may be willing to lend you the $3,800, which you could pay back as soon as you get a new position.

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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at moneytalk@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries.