If you carry balances on your credit cards, you should be aware of a tiny little warning that is likely in the terms of your credit card agreement. This universal default clause is understood by few, yet it can have a dramatic impact on your financial well-being.
How does it work?
A universal default clause is enacted whenever your creditor feels that you are demonstrating signs of financial weakness. Missing a payment on any account could be reported in your credit history. Missing a car payment or falling late on a credit card payment could cause all of your credit cards to raise your interest rate to the default rate listed in your terms. Other triggers can be simply accumulating too much debt. There are many reasons that creditors can decide to increase your rates.
The default rate is usually substantially higher than your normal interest rate. Default rates of over 30% are common unless prevented specifically by state law. This can dramatically increase your finance charges and raise your minimum payment.
If you have special terms on a balance transfer, those rates will also be subject to the higher default rate. This is one reason why creditors offer such good terms on some balance transfer promotions. They know that there is a likelihood that they can charge much higher interest on your balances in the future.
From 2002 – 2006, creditors raced to revise their agreements to include universal default clauses. Many cardholders saw their interest rates and minimum payments increase for reasons they did not understand. For some, these higher payments pushed them over the edge and caused their financial situation to worsen beyond recovery.
Beginning in 2007, some creditors have reluctantly relaxed these policies of universal default. Pressure from Congress has caused some creditors to adjust their practices that have been deemed predatory by some. CEOs of several major creditors testified before a Senate subcommittee about their practices, and many had to answer tough questions about their policies surrounding universal default.
Solutions to Universal Default
We all like to believe that Congress will choose to sign legislation that would outlaw universal default practices. Credit card issuers are pushing for self-regulation instead of increased federal regulation. Surely an act of Congress is needed before this can be rectified.
If you are carrying substantial credit card balances, there is only one real solution to protect you from universal default. Paying off your balances can help free you from your current situation. Make the decision to eliminate your credit card debt for good.