(Mark from California) I was just late on one credit card, will the universal default clause raise all my rates?
Dear Mark,
There was a time when the universal default clause in most credit card agreements would be triggered by a missed or late payment on a single credit card or loan payment. However, the universal default clause is now obsolete thanks to the Credit Card Accountability Responsibility and Disclosure Act of 2009. Known as the CARD Act, credit card issuers are now highly restricted on how they may raise your interest rates.
Your question is a good one, since previously falling behind on a single card account would often result in most or all of your other credit cards raising their interest rates. These rates could often be several points higher, and some would even go so far as increase your rate to the default rate, often 29.99% or higher.
Card companies would seek out any reason to increase your interest rates. They would check your credit report for signs of financial weakness, namely a skipped payment on any credit account. In the 1990s and early 2000s, they would check it every few months. By 2004, most credit card issuers would check your credit report every 1-2 months. Each card issuer would bury a clause (universal default clause) in your cardmember agreement that gave them the legal right to increase your interest rates if they discovered that you had defaulted on any credit agreement, no matter which creditor the account belonged to.
The CARD Act bans the any time for any reason interest rate increases that were commonly used by credit card companies to justify rate increases. All they needed was one sign that you were a higher risk and then they would penalize you for missing a payment. Card companies may no longer do this.
In fact, a card company is severely restricted on how and when they may increase your rates. Generally speaking, a credit card issuer may only increase your rate if you are at least 60 days delinquent on that same account. The primary exception to this is if the increase matches that of prime rate. Variable interest rate accounts are normally pegged to LIBOR, meaning a .5% interest rate increase in LIBOR could justify a .5% increase in your credit card interest rate.
You are correct in being concerned about the universal default clause as this was a common beginning of financial disaster for many a cardholder. However, universal default clauses are no longer a part of cardholder agreements. You can thank the CARD Act for that.
While you are now protected, you should also understand that missing a payment on a credit card can be a sign that your finances are getting out of order. You will need to decide whether it was simply a one-time forgotten payment or a lack of money. If you are finding yourself unable to pay your minimum payments, you may need to consider completing credit counseling.
