What is a Universal Default and What Does It Mean for Me?
By Brett Weiss, Maryland Bankruptcy Attorney on Aug 16, 2007 in General Bankruptcy Information, Maryland
A Universal Default is a provision in (typically) a credit card agreement that lets the credit card company increase your interest rate. It lets the credit card company look at your credit record and if you fall behind on any of your credit cards or other debt, it can jack up your interest rate to as much as 30% or higher, even if your payments to that credit card are on time. At the same time, they will often reduce your credit limit, making it almost certain that you will end up paying overlimit fees of $30-$50 per month.
Why do they do this?
The credit card companies say that if you are behind on one of your payments, it makes you a greater credit risk, and therefore it should be allowed to increase your interest rate to compensate it for and lower your credit limit to protect it from that additional risk. Of course, if your interest rate is doubled or tripled, you have additional fees, and your payments double or triple, a bad situation will just get worse, making it that much harder to ever catch up. And since the credit card companies receive billions of dollars in “default interest” rates, overlimit fees and the like, it looks as if they are just trying to squeeze a few more dollars out of someone who’s already teetering on the edge.
Is it legal? Unfortunately, at the current time it is. Congress has looked at passing legislation that would prohibit Universal Default, but at the current time, nothing has passed.
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