Universal default clauses are one of the sneakier ways that credit card companies can pick your pockets. The best thing you can do is to understand exactly what this policy is, and what it could mean to you.

What is universal default?

A “Universal Default Policy” is a clause that is found in some credit card agreements. Basically it means that if you pay late, or default with any of your lenders, then your credit card company can permanently raise your interest rates - even if you have never been past due with them.

Here’s an example:

Sue lost her job, and while she was looking for another, she missed a few payments on one of her credit cards. Once she had a new job, she worked out the balance, and paid her bill. The next month she was shocked to find that her interest rates had gone up - not just on the account she missed payments with, but on her other credit card accounts too.

What happened? When Sue missed payments on one of her credit cards, her other lenders took the opportunity to put their universal default rights into play, and they raised her interest rates- despite the fact that her missed payments were with a completely different creditor.

You also need to know that missed or late payments on auto loans, mortgages, personal loans, or any other type of loan can be considered grounds for raising the interest rates of your credit cards via the universal default policies.

So, how much can my credit card company raise my interest rates if I’m late with someone else?

If your interest rates are raised because of a universal default policy, then they will be raised to the “default” rate that was given to you when you first signed up for your credit card. It will have been listed in your terms and conditions. Usually it is listed as the rate your account will default to if you miss X number of payments.

For example:

You may have a 9% interest rate regularly, but if you miss a few payments, your interest rate will default to 24% interest.

If you credit card company chooses to raise your rates via universal default, then you will automatically be charged 24% interest form that point on.

Each credit card policy is different, and some credit cards do not have universal default policies. You will have to look at the terms and conditions for your individual cards to see whether or not they have a universal default policy, and how much interest you are likely to be charged.

What can you do if your credit card company raises your interest rates because of it’s universal default policy?

Slightly less than 50% of credit card companies use universal default policies. Each year there is new legislation proposed to outlaw, or limit the negative impact that this clause has on consumers.
Despite those efforts universal default policies are still in effect.

So, if you find yourself in this position, then the best thing you can do is to pay the balance on the card off immediately. You can also consider transferring the balance of the affected card to a different card with a better interest rate.

It never hurts to contact your credit card company, and ask them to reduce your interest rates back to where they were before the increase. Not all companies will be willing to do this, but you will never know unless you ask.

Always remember to read the fine print carefully before you sign up for a new credit card. In particular, look for cards which do not contain universal default policies.

The following information comes from the Consumer Action 2008 Credit Card Survey. Below you will find a list of banks which do not currently use universal default policies. However, I cannot stress enough that you are still going to have to check your individual agreement with your credit card company.

Most of these banks have used universal default policies in the past, and depending on your agreement with them, it could still be in effect.

Also, check the terms and conditions carefully before signing on with a new credit card company - even if they are on this list. For the full results of the 2008 Credit Card Survey you can click here.

Credit Card Companies not currently using universal default policies:

• Citi Cards (They were not included on the survey list, but they have a public policy which states that they do not use universal default. )
• American Express
• Bank of America - (see comments)
• Capital One
• Wells Fargo

If you liked this article, you may want to consider joining our RSS subscribers. That way you will get our future articles delivered to you for free. You can click here to view them in your favorite RSS reader, or you can enter your email address in the box below to have them delivered to you by email. Thanks!

Keep Reading:

• Will Creating A Repayment Plan With Your Credit Card Company Hurt Your Credit Score?
• Why TransUnion Owes You Money
• Do You Lie to Your Spouse About Your Credit Cards?

This entry was posted on Monday, September 15th, 2008 at 9:45 am and is filed under Credit Card Debt, Credit Reports and Scores. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.