Credit Cards: What is the Universal Default Clause?

Most people who carry major credit cards are well aware that the interest rates associated with them tend to be higher when compared to other types of lending conventions for such things as a home or automobile. In addition, anyone who has occasionally paid his or her credit card bill late is also aware that doing so may cause the interest rate on their card to go up—sometimes quite substantially. But wait; did you know that there were other influences that could cause your credit card interest to increase?

Many credit cards carry interest rates as high as 20% or 25% annually, and the wisest of consumers who want to avoid these stiff interest rates make an effort to pay off their credit card balances within 30 days. What many people do not realize, however, is that up to one third of all credit card issuers now include what is known as a "universal default clause" in their bills. This information, usually disclosed in the tiny print on the bill that few people bother to read, indicates that the interest rate on your credit card may be increased if you fall behind on your payments to other lenders, even if you pay your credit card bill(s) on time!

This means that late payments towards an auto payment or utility bill, for example, could show up on your credit report, which could result in your credit card interest rate(s) going up. This, in turn, could also hurt (reduce) your credit score.

Currently, Federal law does not prohibit this practice; the law only requires that lenders disclose it in writing. Credit card companies justify this policy by taking the position that those consumers, who make late payments to any of their creditors, increase the risk for all lenders. Nevertheless, many, if not most credit card customers are unaware that such a policy exists. (Interestingly enough, not all credit card companies have such a policy; in fact, most do not).

Customers who are not interested in having the interest rates of their credit card tied to their ability to pay their phone bill on time would be advised to read the fine print in their credit card statement. If such a policy exists, you could challenge it with your credit card issuer to have it waived, or shop around for another credit card. The lesson to be learned here is a valuable one; when you receive your credit card bill or a notification that your credit card billing terms have changed, take a moment to read the fine print.

Remember, you should always shop for a credit card the way you would shop for any major purchase.

• Research all your options.
• Weigh the costs and benefits.
• Read all of the fine print. Remember, when you sign up for a credit card you are entering into a legally binding agreement.
• And last but not least, caveat emptor-let the buyer beware.

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