Key Consumer Issues - Credit Card Universal Default Policies

Credit Card Catch: Universal Default Policies Raise Interest Rates, Even for Consumers who Pay On Time

You might think that as long as you pay your credit card bill on time, your credit card company can’t raise your interest rates without giving you fair warning-guess again.  Increasingly common among credit card companies is what’s known as a “universal default” policy. These policies are often hidden in the fine print of your credit card agreement or may be tucked away as a policy update in one of the many flyers or special offers you receive from the company throughout the year.

It's bad enough that credit card companies aren’t usually up front about their universal default policies, but what makes universal default even worse is that it may have nothing to do with your payment history on your credit card account or any of your other debts.

Typically, universal default policies have several variations that allow credit card companies to raise your interest rates for almost any reason.  Under a universal default policy your interest rate may go up if:

• Your payment comes in the day it is due but after the hour the company has set as the deadline
  
  
• You’re late making a payment on another credit card or debt (mortgage, car loan, insurance payments, etc.), even if your payments to the credit card company in question have always been on time
  
  
• You bounce a check
  
  
• You go over your credit limit (companies will often allow a transaction that takes you over your credit limit to go through but then penalize you by increasing your interest rate)
  
  
• Your credit score drops or the company detects any change in your overall debt or debt to income ratio. This means the interest rate on a card you’ve carried for years and always paid on time can go up if the company finds out you’ve applied for a loan or another line of credit or if the company just sees a lot of inquiries on your credit report.
  
  

Perhaps even more disturbing than the long list of “reasons” your credit card company can use to justify increasing your interest rate under a universal default policy is the fact that, often, the interest increase doesn’t only apply to future purchases.  It may apply to your current balance as well.  If your balance at the time of the increase is $1,000 and your interest rate goes from 9% to 25%, your interest payment immediately skyrockets from $90 to $250.  Since you’ve already made the charges, there’s really not anything you can do about it.  What’s more, your creditor may make the change without notifying you or drawing your attention to it-it may just show up on your next monthly statement.  For that reason, it’s very important to check your monthly statements, reviewing all fees and interest charges and checking the calculations to be sure the terms are what you think they are. Also, read any notices you get from your credit card company, even if they look like junk mail, to be certain policy changes aren’t hidden in them. Finally, beware of special offers you receive. Often, acceptance of a particular offer or use of a certain credit card feature automatically subjects you to new policy terms.

Currently, almost half of all credit card companies have universal default policies.