The average default rate is 27.88% (CreditCards.com). The finance charge would be $23.23 on a $1,000 credit balance at the average default rate. Compare that to the $12.50 finance charge you'd pay on the same balance but at a much lower 15% interest rate and you'll see just how expensive the default rate can be.
If your credit card issuer increases your interest rate to the default rate, you can have it lowered in six months as long as you stick to your credit card terms. That means make your payment on time, stay within your credit limit, and always have enough money in your checking account to cover your credit card payment. However, the rate might only go back down for your existing balance. Some creditors may still apply the higher default rate to new purchases.
How to Avoid the Default Rate
It's not hard to avoid the default rate on your credit card balance. First, make all your payments on time. If you're late on one payment, get caught up quickly because the default rate kicks in after you're 60 days delinquent, i.e. two missed payments in a row. Second, stay below your credit limit. While many credit card issuers have eliminated the over-the-limit fee, they haven't eliminated the default rate trigger that happens when you charge more than your limit. Finally, make sure you have enough money in your checking account to cover your payment. Returned checks not only lead to a returned payment fee, but they also trigger the default rate.
Thanks to the Credit CARD Act of 2009, there's no more universal default where any creditor could raise your rate to the default rate just because you were late or over the limit with another credit card.
Credit Industry Default Rate
A different type of default rate is used by the credit industry to measure the number of credit cardholders who are late on their credit card payments. It's the rate at which consumers are defaulted on their credit card balance. This default rate considers credit cards that are six months past due, but haven't been charged-off or bankrupted. It also includes mortgages and auto loans that are more than three months past due.
The default rate can be used to measure the health of the economy. Rising default rates - more borrowers being late on their credit card and loan payments - could mean the economy is experiencing difficulty. High mortgage default rates mean an increase in home foreclosures could be on the way.
