Does Universal Default Still Exist for Credit Cards?

Increasing interest rate
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What is Universal Default?

Universal default happens when a lender enforces the penalty rate on a borrower that has defaulted with another lender or taken another action that the credit card issuer thinks is risky. For example, your American Express interest rate increases because you were late on a payment on your Citibank Visa. Universal default allowed credit card issuers to increase interest rates "at anytime, for any reason."

Did the New Credit Card Law Get Rid of Universal Default?

The Credit CARD Act of 2009 prevents credit card issuers from implementing universal default by limiting their ability to raise interest rates on existing balances. Credit card issuers can only raise the interest rate on an existing balance after the account has become 60 days past due, the index rate for a variable APR increases, an introductory rate has expired, or you’ve completed or defaulted on a debt management plan.

Remnants of universal default remain, particularly when you have multiple credit cards from the same issuer. Say you have two Capital One credit cards. If you default on one credit card, Capital One can raise the interest rate on both credit cards. However, other credit card issuers are not allowed to raise your rate for a default on another credit card, at least not on existing balances.

Legal Interest Rate Increases

Rates can also be raised on future credit card balances, for any reason, as long as the credit card issuer gives a 45-day advance notice.

You’ll have the opportunity to opt out of the rate increase but your card issuer may not allow you to make additional purchases on your card. Additionally, the increases interest rate automatically applies to any purchases made 14 days after the rate increase notification was mailed even if you later opt-out.

Cannot raise rates retroactively based on late payments to other credit cards.

To know if your credit card has universal default, check your credit card agreement. You can find a copy on your credit card issuer’s website or the CFPB credit card agreement database.

The Importance of Timely Payments and Paying in Full

It’s still important to pay your bills on time, even if your credit card issuer doesn’t have a universal default clause. Being late can still trigger the penalty rate, if you’re 60 or more days past due. Legally, credit card issuers are required to lower your rate for the existing balance after you’ve made six consecutive timely payments. Purchases made after the penalty rate becomes effective may still receive the higher rate, even after you’ve brought your account back into good standing.

A higher interest rate can lead to higher minimum monthly payments and more interest paid on your account. Having a higher interest rate on your credit card can also increase the amount of time it takes you to pay off your credit card balance since more of your payments will go toward interest.

Paying your balance in full each month keeps you from being subject to interest rate changes. Keep your credit card transactions at a level that you can afford to pay off each month to eliminate the risk of having a higher interest rate impact your credit card balance.