Universal Default

Posted by Mike Smith :: September 28, 2007 @ 7:03 am

As I was browsing through loan requests on the Lending Club site, I saw one user recounting how his credit card rate jumped from 13% to 25% without warning. Such jumps are quite common. While the cause of the jump in this situation was likely the end of a teaser rate (a low rate when you first sign up for a new account) such rate changes are often the result of a practice known as universal default.

Universal default is a common method for raising rates used by credit card companies (for more information, see this GAO study). Clauses in your credit card agreement may allow card issuers to raise your rate if you have a late payment on a different card or line of credit! By monitoring your credit report, the credit card company could see that you paid another bill late and jack up your rate as a result.

While it may not seem fair that one card could change its rates because of payment activity on another account, there is actually more alarming news: the rates used by credit card companies for customers who experience universal default tend to be extremely high. Some cards will raise the rate as high as 32%.

Pressure from lawmakers and consumer outrage are slowly having an effect on credit card companies. A few have done away with universal default. In the cat and mouse game of fees and excessive charges, it will likely only be a matter of time before a new method of exploiting customers will be created to take the place of universal default. It’s not only the method that triggers the high rate that’s outrageous; it’s the rate itself.

Consumers looking for reasonable interest rates are increasingly turning to funding sources like Lending Club. The P2P loans they find there have some of the most affordable interest rates available. As loans from Lending Club have a fixed interest rate for their entire 3-year term, they aren’t subject to changes in the interest rate through universal default. My hope is that over time practices like universal default, used liberally by profit-driven credit card companies, will be eliminated completely.