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Avoid Triggering Universal Default Clause
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 it Works
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.
Default Rate
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.
Trends
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. |
