What is Credit Card Universal Default?

One of the most controversial and polarizing features of many credit cards is what is known as universal default. Most people are aware that if they are late with payments, they may be charged what is called a default interest rate. What they may not know is that there may be universal default language in their user agreements. What this basically means is that if the user defaults on payments with any lender, their card company can still raise the interest rate to the default level. For the average consumer, such a practice seems predatory at best; however, since the mid-1990's universal default has become a fact of credit life. Knowing the implications of this fact becomes of paramount importance to the credit card user.

Regardless of whether or not one thinks universal default is right or wrong, it is important to understand what can happen if you default on a payment while carrying a balance on cards that enforce the universal default language of your agreement. Obviously, the best defense against any repercussions is to make all payments in a timely manner. Unfortunately, if through some misfortune that is not possible, the consequences can be severe, to say the least.

The first problem is that someone in dire financial straits may default on one payment. Suddenly, several balances will be subject to default rates, creating a cascade effect that will essentially make it impossible to catch up. Worst of all, even after someone turns the corner financially, the default rate applies until the balance is paid in full. Anyone making minimum payments knows how long that can take.

However, it is possible never to default on a payment and still run afoul of the rules. For example, suppose through some sort of fraud or institutional error a payment is not properly credited. Suddenly, every credit card you have starts charging the default rate. While it is possible to get the error corrected on your credit report, credit card issuers are under no obligation to normalize your interest rate.

So, while legislation has been repeatedly proposed to get rid of such perceived abuses as universal default, it still exists. The best way to deal with it is to see to it that your credit card issuers do not engage in the practice. As of now, only about half of them do; and in 2007, Citibank became the first lender to discontinue the practice voluntarily. So it seems that the day may not be too far off when universal default is a thing of the past. Until then, it is one more thing consumers need to keep in mind when choosing what credit cards to carry.