Have You Heard of Universal Default?

As a credit card holder, there are some terms that you should know inside and out. Most of these are terms that you get used to as you start using and learning more about your credit cards. For example, you probably already know what the “interest rate”, “APR” and “finance charge” each refer to. However, there are some terms that aren’t as commonly known but which are just as important for credit card holders to add to their financial vocabularies in order to make sure that they truly understand everything about their credit cards that’s good to know. One of those terms is “universal default”.

Universal default is a term that refers to a highly questionable (but unfortunately) common practice among credit card companies. The practice is for companies to change the terms of a credit card from the good terms to the default terms based solely on the fact that you as a borrower have defaulted on other loans. For example, let’s say that you have two credit cards – one that has a 19% interest rate and one that has a promotional interest rate of 5%. You miss a series of payments on the 19% interest rate card but pay the other one off in a timely manner. With universal default, the lender of the 5% interest rate changes the terms of the promotional deal to the default terms of the card (let’s say that’s a 22% interest rate) based solely on the fact that you have defaulted on the other credit card.

The practice of doing this is considered to be a very controversial issue. Most people believe that they should only be penalized for defaulting on credit cards by the credit card company to whom they have defaulted. In other words, they feel like it would’ve been fair for the lender of the 19% interest rate card in the above example to penalize them with default terms and fees but that it is unfair for the lenders of other credit card lines (such as the above 5% credit card lender) to also change the terms when no missed or late payments have caused that specific credit card to default. The practice is so controversial that Congress has considered implementing laws against that but those laws have not yet been approved and therefore universal default practices still continue.

As a credit card consumer, it is very important for you to know about universal default because it can have a huge impact on you if it’s something that you become a victim of. You want to make sure that you are making on-time payments to all of your credit card companies because you may risk universal default if you default on even one of these loans. This can cause you to fall into a bad situation where you can’t pay off any of your credit cards because the terms are so unfavorable to you. This may not be fair but it’s the reality of credit card lending today and something that you need to be aware of.