What is a universal default clause?

Credit card companies have added universal default clauses to the terms of our credit card agreements in recent years. These changes could mean big trouble for people with even one late payment.

Credit card issuers have been slipping universal default clauses into our card agreements in recent years. Even cards that we have had for many years are finding these clauses added through changes in our cardholder agreement. These usually come buried in other information about our account, so that the average cardholder doesn’t bother to read them.

Universal default clauses may not mean much to someone that pays their card off every month. However, if you carry substantial balances, these could really affect your interest rates and minimum payments.

In a nutshell, universal default clauses state that if you default on any cardholder agreement, every creditor that has a universal default clause in their agreement with you reserves the right to immediately penalize you by raising your interest rate. If you have a credit card and pull your credit report, you will notice frequent, sometimes monthly account review inquiries by that creditor. They are checking diligently to see if you are late on any other account. They are looking for any justification for raising your interest rates.

Once you understand that profit motive, then it is easy to see why credit card issuers are so willing to grant you low interest rates on balance transfers. They know that the odds are that many of their cardholders will fall behind on one credit card, thereby providing a reason for raising your rates on all of your cards.

Consider a typical scenario. An average household has approximately $9,000 in credit card debt. Suppose the total of your minimum payments are $165, of which $74.25 are finance charges. Now suppose you have a store card with a $30 balance and $10 minimum payment that you forgot to pay. By missing that payment, the balance on your major credit card is subject to the default penalty rate. This can be well over 20%, but we will use 18% for this example. Even though you were never late on this account, your minimum payment would jump to $225 and your finance charges would comprise $135 of that amount.

This practice has not gone unnoticed, and some members of Congress are proposing a bill that could either modify or outlaw
altogether the practice of declaring universal default. Until that time, it is essential that you do not default on any
cardholder agreement. That one late payment on your credit report could be just the tip of the iceberg when your other card
issuers invoke universal default. Once you get to this point, you should make immediate changes to avoid falling further
behind. If you have been hit with universal default clause related rate increases, try calling your creditors to request they reverse
the rate increase. Identify a simple reason why you forgot to make one payment, but show that you are still strong
financially. If you can make a much larger payment than the new minimum, tell them that and send the payment in immediately.
They may be willing to drop your rate back down again.

If this causes you to begin falling hopelessly behind, seek the help of a reputable credit counseling agency before it is too
late. They may have strategies and tools to help bring your debt under control while reducing fees and interest.

Update: Universal default is no longer a legal practice of credit card issuers in the US. The Credit CARD Act of 2009 prohibited increasing interest rates on any credit card (other than variable rate adjustments) unless the cardholder fell at least 60 days delinquent on the account. As such, universal default clauses are now absent from credit cardholder terms.

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