Have you been shocked to find the interest rate on one of your credit cards was raised – often dramatically - even though you may never have missed a payment? The problem lies with the universal default clause, says LSU AgCenter family economics professor Dr. Jeanette Tucker.
The default clause says that a missed payment can result in an automatic rise in interest rate. "But the real shock is that the interest rate not only applies to the account for which you missed a payment, but for all other accounts that carry a universal default clause," Tucker says.
This means that interest rates may rise on accounts with perfect payment records, the family economist explains. Even if you have never been late on a particular account, but you miss a payment on another account, you will be considered as being in default with all accounts that carry a universal default clause.
In addition, being late on a payment to a credit card, auto loan or cell phone account will not only result in a $30 to $40 late fee, but also can lower your credit score. When negative information is received and shared by credit reporting agencies, interest rates, even "fixed" rates, may rise on accounts with a universal default policy.
Tucker says that occurrences that may cause you to be considered in default include one missed or late payment on any credit account, exceeding credit limits or making a payment from a checking account with insufficient funds.
When interest rates are raised because of universal default, credit card companies are legally required to notify the consumer at least 15 days before the rate hike. You may reject the new rate, but don’t be surprised if the credit card is revoked. Credit card companies defend the universal default policy by arguing that consumers who default on any credit contract pose a higher risk that justifies the higher interest rate.
Tucker offers self-defense strategies against rate hikes associated with the universal default clause.
• Comparison shop for contract terms as hard as you shop for interest rates. Search for the words "default rate" in the fine print before signing new credit card contracts. Refuse any contract that includes a universal default clause.
• Always pay your bills on time. Mail or transfer your payment electronically early enough that it arrives at least two days before the due date. The extra time ensures adequate time for the creditor to process and post the payment to your account by the due date.
• If you have been penalized for missing one payment, contact the credit card issuer. If you have an excellent payment history and all previous payments have been on time, you may be able to negotiate to have the penalty waived. Be sure to request that they remove the default from your credit report.
For more information on family finances and consumer topics, click on the Family and Home link on the LSU AgCenter homepage, at www.lsuagcenter.com. For local information and educational programs, contact an extension agent in your parish LSU AgCenter office.