May 27, 2006

What is Universal Default?

Did you read the fine print on your credit card disclosure?  It may have contained a sentence or two regarding Universal Default.  Universal Default is a clause that allows a creditor to raise your interest rate to a default rate (in many cases over 30%) even if you have never missed a payment to that creditor.  In other words, you are considered in default with that creditor even though you have never been late.

So what triggers the Universal Default clause?  According to a 2005 survey conducted by California based Consumer Action (consumer-action.org a non-profit education and advocacy organization), the Universal Default clause can be triggered simply for a drop in your credit score.  As a matter of fact, “credit score gets worse” is the #1 reason cited for invoking this clause.  Sound outrageous?  At least one U.S. Senator believes so and he has introduced legislation to put an end to this practice.  Last month, U.S. Senator Robert Menendez (D-NJ) (menendez.senate.gov) introduced a “Credit Card Bill of Rights” stating “American families are being crushed by credit card debt, and the increasingly predatory behavior of some credit card companies makes no sense beyond the bottom-line for the companies”.

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