The Perils of Universal Default

Universal default is a clause in many credit card agreements which states that if the card holder defaults on payments – any payments – they can be subject to an increase in interest on their credit cards. And when we say that any payments can affect this, we mean any: utilities, car notes, mortgages, and other payments that have nothing whatsoever to do with your credit card account. This might not sound fair, but it’s the basis of universal default.

It makes sense, in a way. If you are late on payments, it can affect your credit score. And when your credit score is lowered, you become a less desirable customer for credit card companies. The agreement you signed was tailored to your credit score at the time. The same agreement might not be a safe bet for a customer with a worse score.

Still, it just feels shady and opportunistic, as if the companies are looking for any reason to raise your rates. That, too, makes good business sense, as the industry is facing high levels of default and delinquency. But it doesn’t do much to endear customers and earn their loyalty.

If your credit cards participate in universal default, you could have an unpleasant surprise any time something occurs which lowers your credit score. Imagine struggling through a difficult financial period, only to find that your cards’ interest rates have doubled or, in some cases, tripled. Critics of universal default point out the dangers of overcharging someone who is already in dire straits, causing them to risk default with all of their lenders.

There is also the fact that credit reports aren’t infallible. Creditors make mistakes, and identity theft can account for charges that you never authorized. If your credit card interest rate has increased because of errors on your report, you have the right to get your previous interest rate reinstated. Credit bureaus are also required to correct the problem and send you a free copy of the corrected report.

To protect yourself, take a hard, close look at the terms and conditions of all of your credit card agreements. Look for a clause that mentions universal default. If you’re still unsure, call the customer service number and speak to an agent. Ask them if they use universal default. If they do, go elsewhere to get a credit card. Credit cards are a business, and the companies will look after their own best interests. It’s only fair that you look after yours.

Congress itself has warned the credit card industry against what they deem an unfair and predatory practice, but only CitiBank has voluntarily removed their universal default provision. As Congress pushes for change, these provisions might start disappearing altogether – voluntarily or not.

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