Imagine that you were out with a group of your friends. While you guys were out, say that you had a disagreement with one of your friends over money. Nothing major, just a difference of opinion. The night out continued as planned, so you believed the issue had been resolved. However, the following day, much to your surprise, you find out that not just the one, but all of your friends have turned against you. That would put a real damper on your social life, wouldn’t it?
Now, what if I told you that the scenario is not imagined at all? In fact, it is a very real situation for a lot of credit card users and it may even happen to you. Your credit card provider has the legal right under the “universal default” clause to raise your interest rate and lower your credit limit for any financial discretion that you have with any financial institution.
How universal default works
Basically, universal default works like this. When the economic climate is bad, your credit card provider begins to get a little nervous. Credit card debt is a form of unsecured debt, so your credit provider knows that if your rent and your credit card payment were due at the same time—and you only had enough money to pay for one of the bills—you would probably opt to pay your rent.
In an effort to recoup some of the money they will surely lose to defaults, your credit card provider will begin to check the credit reports of their customers. They are looking for any changes (big or small) or proof that you paid one of your bills late. It could be a utility bill, a car note, department store bill, or even a gas card. As long as your payment was received 30 days late, you can be labeled a “credit risk.”
The universal default clause is explained in greater detail in your written credit card agreement, though you’ll have to dig deep within the fine print to find it. To impose the universal default rule to your account, the credit card provider legally has to notify you in writing 15 days before the interest hike is enforced. If you believe the rate increase will create a financial hardship for you, you have the legal right to opt out of your credit card agreement. This means your credit card provider must allow you to pay your outstanding balance at the normal fixed interest rate. However, your account will essentially be closed at this point because you will never be able to use the credit card again.
“Mind your own business”
The government has taken action to put an end to universal default, in effect telling credit card companies to mind their own business. The new credit card legislation that passed through the Senate last week bans universal default, and hopefully will remain a clause in the version that makes it to President Obama’s desk.
The Federal Reserve has also issued regulations stating that the universal default clause can no longer be imposed or included in credit card agreements. Your credit card provider can only hold you accountable for in-house financial discretions.
Don’t get too excited, though. The new regulation from the Fed isn’t schedule to take effect until July 1, 2010. In the meantime, credit card providers are free to increase interest rates anytime they deem fit. To stay under their unscrupulous radar, try to remain current on all of your bills. By staying on the good side of each of your creditors, they’re less likely to rally against you.
This guest post was contributed by LaShon Fryer. LaShon is a freelance writer and blogger for business publications. When she is not writing, she is busy in her children’s apparel store Bring-2-Fruition. In January she will return to her alma mater, Temple University, to pursue her M.B.A. in Financial Management.