Beware of the Universal Default Clause
If you're new here, you may want to subscribe to my RSS feed. Want more frequent updates follow me on Twitter. Thanks for visiting!
photo credit: banoootah_qtr
Make a late payment on your mortgage and your credit card interest rate goes up–even though you’ve been making timely payments on the card.
It’s called the Universal Default Clause and it’s perfectly legal. What happens is your credit card company monitors your credit on a regular basis, sometimes monthly, for any changes. A drop in your credit score and the card company can raise interest rates to double–or even triple–your current rate, putting you in a larger and larger hole if you’re not paying your credit card bills in full each month. Any of the following can result in a rate hike:
- Making a late payment on a home or car loan
- Carrying too much debt
- Exceeding your credit limit
- Applying for a new mortgage or car loan
- Opening new credit card accounts
The Universal Default Clause is not the same thing as the standard default clause, which allows the company to raise your rates if you miss a payment or otherwise default.
The easiest way to protect yourself from the Universal Default Clause is not to get such a card in the first place. Yet, that plan isn’t foolproof. Consumer Action reports that while many card companies claim to have dropped the universal default clause they haven’t abandoned the practice. Instead, you’ll find it in the fine print under the change of terms provisions.
Look for verbiage like this from Chase :
We reserve the right to change the account terms (including the APRs) at any time for any reason, in addition to APR increases that may occur for failure to comply with the terms of your account. The APRs for this offer are not guaranteed; APRs may change to higher APRs, fixed APRs may change to variable APRs, or variable APRs may change to fixed APRs. Any changes will be in accordance with your account agreement.
…As described in the Cardmember Agreement, we reserve the right to change the terms of your account (including the APRs) at any time, for any reason, in addition to APR increases that may occur for failure to comply with the terms of your account.
Chase, Commerce Bank, Discover, EverBank, Franklin Templeton Bank & Trust, GE Money Bank, HSBC, Metropolitan National Bank and US Bank would raise cardholder APRs based on information from credit reports and credit scores, Consumer Action reports.
If you already have a credit card, be sure to look through every piece of mail you receive from the company. This will protect you from getting blindsided by a change in rates or terms. For example, many card companies include term changes when they send out their privacy policy, so don’t throw such things away before looking at them; they may contain changes to your interest rate, the events that trigger the credit card’s default APR, and various fees. Some card issuers will give you a chance to opt out of the changes; in some states this is required by law.
Here’s how to protect yourself from the Universal Default Clause:
- Read the fine print if you’re looking to open a new credit card account. Call the credit card company and ask what specific circumstances will affect your interest rate if you’re confused by the terms.
- Check your current statements and credit card agreements to identify which cards have a universal default clause that you weren’t aware of until now. Again, if you’re uncertain after reading the fine print, call your credit card company.
- Know what you owe and to whom. Keep accurate lists of your credit cards, balances, limits, interest rate and payment due dates.
- Run your credit report. You should check it at least once a year.
- Pay your bills on time. Monitor your accounts carefully and examine each bill when it arrives to check its due date. Consider paying bills when they arrive instead of when they’re due. Or pay your bills automatically each month with your bank’s online bill pay feature.
- Call the card issuer, if you’re having trouble making your credit card payments. They might be able to adjust your monthly payments so that they’re more manageable.
Tags: credit | Debt Management | Fees | Interest | personal finance | Saving Money
This entry was posted on Thursday, July 17th, 2008 at 3:30 am and is filed under Credit & Debit Cards. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.
