Protecting your finances from the dreaded Universal Default Clause

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Protecting your finances from the dreaded Universal Default Clause
2 years ago
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There are many despised practices in the world of credit cards and credit card issuers, but perhaps none is more egregious than the dreaded universal default clause. If you hold a credit card, chances are this clause is part of your credit card agreement even if you are not aware of it. That is because credit card issuers typically bury the language of the universal default clause deep in the fine print of their card agreements ??where most consumers are unlikely to notice it.

What is the Universal Default Clause?
It is important for every consumer who uses a credit card to be aware of this nefarious clause. Even those who always pay their bills on time could run afoul of this clause in the future, and the terms of the universal default clause mean that a single slip-up could be deadly to the consumer's finances.

The terms spelled out in the universal default clause mean that if a consumer is even one day late on any payment to any creditor that consumer could see his or her interest rates spike to more than 29% on many additional bills. That means the balance on additional credit cards could quickly balloon as the interest rate rises to nearly 30%. To make matters worse it is entirely possible ??even likely ??that the interest rate will be hiked on most if not all of the consumer's accounts. This significant increase in interest rate will likely result in higher minimum payments and put that consumer even further behind.

How are interest rates affected by the Universal Default Clause?
One of the most damaging aspects of the universal default clause is that this clause can be invoked by many different issuers. These days many consumers use multiple credit cards, and chances are good that all of those credit card agreements contain a universal default clause. The existence of that simple clause means that a late or missed payment on any bill ??not just a big ticket item like a car loan or mortgage payment ??could trigger the clause.

And if that clause is triggered most credit card issuers will quickly raise the interest rate on that cardholder. The amount of the increase will vary from issuer to issuer, but the new interest rate could easily exceed 29%. With interest rates that high it can be all but impossible to pay off even a small credit card balance.

Consider these examples
If you doubt the danger lurking in your credit card issuer's universal default clause just consider these telling examples.

- Suzy is one day late paying her water bill and this late payment is now part of her credit report. The next time Suzy's credit card issuer checks Suzy's credit report that late payment is noted. This late payment triggers the universal default clause, even thought Suzy made her credit card payment on time. Due to this single slip-up Suzy's new credit card interest rate is now a whopping 29%. And chances are the interest rate on her other credit cards will rise as well as other credit card issuers check her credit report.

- Bob always mails his cable bill payment in on time, but due to a problem with the mail the payment arrives a week late and this late payment is reported to the credit reporting agencies. Bank ABC now does a routine check of its cardholders' credit reports and discovers this late payment. Suddenly Bob's reasonable 9% interest rate has skyrocketed to 29%, resulting in higher minimum payments and an inability to pay the balance in full.

There are countless other examples of the damage wrought by the universal default clause, and many real life consumers have found themselves in the same place as our fictional Suzy and Bob. Even if you religiously pay your bills on time, it is important to know that a single slip-up in any payment could result in financial devastation. This is particularly true for those consumers who routinely carry balances on their credit cards. A balance that is easy to handle at 10% may not be so easy to work with if the interest rate balloons to nearly 30%.

What is the Government doing to fight these abuses?
There is good news on the horizon in the form of the Credit Card Accountability, Responsibility and Disclosure Act of 2009. This set of credit card protections was signed into law by President Obama on May 22, but there will be a significant delay before those provisions will actually take effect. The provisions of the law, including an end to the practice of universal default, will take effect in late February of 2010.

Until then consumers can protect themselves by checking their credit card agreements carefully, even if it means wading through pages of difficult to read fine print. It is also a good idea to contact each credit card issuer and ask if they use the universal default clause to set interest rates. Taking these proactive steps now is the best way to protect yourself and your finances from some unpleasant surprises down the road.
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