Universal Default

Mar 20, 2012 by

One of several hazards that goes along with borrowing money through a credit card account is that the interest rate can change unpredictably. Maybe you’ve never been late with a payment on a credit card account, but nevertheless you open the statement one month and bang: Your rate’s jumped from 11.9% to 19.9%. Why?

Credit Rating Change

When a credit card company bumps the rate for even a well-behaved account holder, the likely reason rests with what’s called Universal Default. Card issuers monitor account holders’ credit history. A late payment on an unrelated car loan or utility account could trigger a jump in the consumer’s credit card interest rate, if the card issuer concludes the account holder has become a riskier borrower.

Up until 2009, when a card issuer raised rates, the new rate applied to the entire account balance. So money that a consumer thought had been borrowed at 7.9% suddenly began costing 18.9%, for example. Yikes!

CARD Act

But the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 prohibited retroactively raising APRs. Universal default still lives—credit card issuers may raise interest rates, even if a card holder’s never been late on a payment—but the new rate may apply only to future purchases, per the CARD Act. Nothing, however, prevents the card issuer from cancelling an account altogether, which many will do based on risk perception.

Exceptions

The CARD Act’s general prohibition on retroactively raising interest rates does have exceptions:

  • An introductory rate period ends (‘teaser’ rate periods must last at least six months).
  • The account’s interest rate is tied to an index or is otherwise variable.
  • The account holder completes a Debt Management Plan, or stops complying with the terms of a workout agreement.
  • The card holder is more than 60 days late in making a payment on the account.

Active Military

There’s one more exception to the prohibition on retroactively applying a higher rate to an existing balance. Federal law caps credit card APRs for military members on active duty at 6%. But when active duty ends, a card issuer may boost an APR and apply it to the entire balance, not just future purchases.

Are You Subject to Universal Default?

In 2007, Citibank voluntarily eliminated universal default clauses from its credit card agreements. But about half of all credit card issuers include Universal Default in their Credit Card Agreements.

If you’re like me and would prefer water-boarding to trying to decipher one of those microscopic font Agreements, phone the company before applying for its card and ask whether it retains Universal Default rights.

What About You?

Have you experienced an abrupt jump in the APR on a credit card? Do you know why the rate changed?

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