Universal default refers to a provision typically found in some credit cards’ cardholder agreements. This provision allows the credit card company to increase the interest rate on the card if the cardholder fails to make their minimum monthly payment.
Importantly, the interest rate can also be raised if a customer defaults on a different credit product, such as a car loan or a mortgage, even when that loan was provided by a separate lender.
Key Takeaways
- Universal default is a provision in some credit card contracts.
- It allows credit card companies to raise their interest rates if the customer defaults on any of their loans, including those from other lenders.
- Consumer protection limits the extent to which companies can impose such rate increases.
How Universal Default Works
Historically, universal default provisions allowed credit card companies to hike interest rates on the full outstanding balance of credit card debt. However, with the implementation of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act in 2009, companies can now only increase interest on new purchases made by the customer. This regulation helps customers who fail to make minimum payments by enabling them to pay off past purchases at a lower, older interest rate, making it somewhat easier to work their way out of debt.
The CARD Act has made universal default provisions less financially burdensome for credit card users, although it hasn’t eliminated them completely. The increased interest rates, termed the “default APR,” are often 30% or higher. Under the terms of the CARD Act, credit card companies must provide 45 days’ notice before imposing this higher rate.
Given these provisions, customers should carefully review their cardholder agreements to understand the potential costs if they default on any loans. Failure to meet minimum payments could lead to sudden and substantial interest rate hikes.
Example of Universal Default
Linda is a long-time credit card customer at XYZ Financial. On January 1st, she obtained a car loan from ABC Leasing. Over the following months, she struggled with her car loan payments and missed a complete payment in March.
In late April, Linda received a notice from XYZ Financial stating that her interest rate would increase according to the universal default provision in her cardholder agreement. The notice explained that her risk profile had changed due to her default on the car loan from the previous month.
Due to the CARD Act, XYZ Financial cannot charge Linda the higher default APR on her existing outstanding credit card debts. However, this higher APR will apply to all new debts. Therefore, it is crucial for Linda to consistently make her monthly credit card payments moving forward to prevent additional financial burdens from higher interest expenses.
Related Terms: credit card agreement, minimum monthly payment, car loan, mortgage, default APR, annual percentage rate (APR).
References
- United States Code. “Public Law 111-24 - 111th Congress”, Sec. 171(a).
- United States Code. “Public Law 111-24 - 111th Congress”, Sec. 101(a)(i)(1).
