The Vicious Cycle of Debt Collection: The Universal Default Clause, is it in your Credit Card Agreement?

When you applied for your credit card, did you read through the fine print under the terms and conditions?  Do you know if your credit card agreement contains the universal default clause?

Credit Card companies have recently added universal default clauses to the terms of our credit card agreements.  This could be very detrimental for consumers with even one late payment. 

How it works.

This provision allows credit card companies to pull your credit report on a regular basis.  If there are any changes that have negatively affected your credit report, a higher interest rate can be applied to your credit card.  This even includes any late payments on your mortgage, car, or a late utility bill. Sadly, this could not only increase the interest rate on future purchases, but also raise the interest rate on the consumer’s entire balance.  For example:  if you are late one time on your car or mortgage payment, your credit card (if it has a universal default clause) could rise from 9% to 27% instantly.

We are only human. We all make mistakes.  Is it fair, moral, or decent for credit card companies to increase your APR up to 30% if you late on ONE payment? How are consumers able to establish credit, keep credit, and pay debt in “good faith” if these are the sneaky games credit card companies’ play?  But wow, think of all the extra money the shareholders of the credit card companies make a year.  Is THIS why the rich keep getting richer and the poor getting poorer?  Is THIS why average working citizens cannot get ahead?  One strike you’re out, and the credit card company is up to bat.

Approximately 45% of credit card companies have a universal default provision contained somewhere within their card member agreements. 

Credit Card companies did not mean to hurt consumers when they established the universal default clause. (Yeah, right!)  Rather, it was established to protect them against potential losses by charging higher interest rates to consumers that are high risk with degrading credit ratings (By all means if you are one day late on a car payment, you should be considered high risk to that multi-million dollar bank, right?)  However, marketwatch.com describes the provision as a common practice used by credit card issuers to increase consumers’ annual percentage rate. 

Chase has just joined Citibank, which no longer increase rates for customers based on negative information on their credit reports.  However, they may review your credit record when adjusting your credit limits and other terms.

Currently, there are only a handful of states that have and are trying to pass a bill to ban these universal default clauses.

What do we do?

Gain awareness; review your credit card agreements. If you get an offer in the mail for a credit card that has a universal default clause, run has fast as you can.

Did you know? 

On February 7, 2008, Representatives Carolyn Maloney and Barney Frank introduced a credit-card bill of rights that would make it harder for issuers to add fees and hike rates. 

Senator Carl Levin is also sponsoring a bill that would cap rate increases, rein in fees and require clearer disclosures of all costs!  Wouldn’t that be nice?