Default Clauses Versus Universal Default Clauses

By Susan M. Keenan

Reading the fine print attached to credit cards is a good idea these days.  So many variations of credit cards exist on the market today that the selection often proves difficult for the first time credit card holder.  However, no matter how attractive that tiny rectangle of plastic may be or how enticing the rewards program is, one thing that you want to avoid at all costs is a credit card that comes attached with a universal default clause.

 

Usually, the credit card application form will include information on whether the credit card company has applied the universal default clause to the credit cad or simply a normal default clause.  Knowing the difference between the two can make a big difference to the fees and interest rates that the credit card holder pays.

 

A universal default clause is one that provides credit card companies with the right to increase a credit card holder’s interest rate in the event that the credit card holder makes a payment late or past the due date on any one of his or her billing account.  In essence, this means that even if the consumer makes his credit card payment on time, his interest rates on that credit card can increase simply because he was late paying on a different bill. 

 

The universal default clause includes late payments on any of the following types of accounts: credit card accounts, store card accounts, utility bills, car installment loans, and mortgages.  It does not even matter how late the payment was or what the amount due was.  It only matters that the payment was late.

 

Usually, this is included in the small pamphlet that explains the terms of the credit card account.  In fact, the new interest rate that the credit card company will put into effect is typically listed in the pamphlet.  This change in the interest rate is usually a large increase that can be up to double or triple the original interest rate charged to the consumer’s account.

 

Unfortunately, the consumer is at the mercy of the credit card company.  The companies justify the increase by stipulating that the consumer’s credit worthiness has decreased due to this negative activity on another account.  They infer that the consumer now exhibits a greater risk to the credit card company and the likelihood that the consumer will become delinquent on the account he holds with them is greater.

 

On the other hand, the default clause that many credit card companies employ simply involves the particular account in question.  If the consumer makes a late payment on that credit card account, and that account only, the credit card company has the right to increase the interest rate on that account. 

 

As with the universal default clause, the terms of the default clause are explained in the fine print of the credit card application form or in the pamphlet that explains the terms of the credit card account.  Applying for and accepting the credit card means that the consumer agrees to these terms and will be held to them.

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