Universal Default Explained

04 Aug Universal Default Explained

Let’s say you’ve got a Citibank card and a Chase card. You’ve never been late with your Chase card, but you’ve fallen behind on your Citibank card. Wake up one morning and you find that your Chase card’s interest rate has gone from a cushy 9.9% to an outstanding 29.9%.

Welcome to the world of universal default.

Universal default is a lender’s policy to change the terms of a loan from the normal terms to the default terms when that lender is informed that their customer has defaulted with another lender, even though the customer has not defaulted with the first lender.

The provision, buried deep within your credit card agreement, is so controversial that lawmakers have clamored for it to be outlawed. Rep. Keith Ellison, D-Minn., and Sen. Jon Tester, D-Mont., have introduced federal bills to bar the use of “universal default” by credit card issuers. And on the state side, Nevada enacted a bill banning universal default. A similar bill passed by New York’s legislature will bar card companies that do business in New York from enforcing universal default against New York card holders; that bill is on the way to the governor for his signature.

As more laws are passed to protect consumers from universal default, the practice will recede into the past. But until that happens, watch your credit card statements and be sure you don’t fall under the weight of universal default.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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