Universal Default

Universal default is practice whereby a credit card issuer increases a credit cardholder’s interest rate if the individual is late making a minimum payment on any debt that is reported to the credit bureaus. For example, if Jenny has a Visa card and a Discover card and she misses the payment deadline on her Discover card, her Visa card issuer might increase the interest rate on her Visa card. Her Visa card issuer might even increase her rate if it learns Jenny was late paying her car loan. 

Universal default practices were made less severe by the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (Credit CARD Act), a law designed to protect credit card users from abusive lending practices by card issuers. Its primary goals were the reduction of unexpected fees and improvements in the disclosure of costs and penalties. The CARD Act changed many of the rules that credit card companies must follow. One of those rules restricted the balance amounts on which card issuers can increase a consumer’s interest rate. Because of the legislation, issuers can’t increase the rate on your existing credit card balance unless you are 60 days delinquent on that account. However, the CARD Act did not eliminate universal default or make it illegal, and issuers can decide to increase your interest rate on future charges.

To understand when the interest rate on your credit card can go up, by how much and for how long, read the card’s terms and conditions. Specifically, read the section on the penalty rate, also called the default annual percentage rate (APR). This section of your credit card conditions will describe the interest rate that may go into effect if you pay late. For example, a card might have a penalty APR of 29.99 percent variable, based on the prime rate, that goes into effect if you make a late payment or if your payment is returned unpaid. The penalty rate may apply indefinitely.

Credit card companies routinely check their customers’ credit reports to look for signs that a customer has become a higher-risk candidate for extend credit. If the companies find signs of increased risk, such as late payments on another account, they might choose to reduce a customer’s credit line, charge the customer a higher interest rate or even close the account. Card issuers are trying to make sure they don’t lend money that won’t be repaid, and they charge customers based on how much of a credit risk they pose.