Universal Default by Any Other Name Still Stinks

Posted by Mike Smith :: February 28, 2008 @ 5:28 am

I’ve written about universal default in multiple posts over the past few months. Here’s an overview post. Even as some credit card issuers are discontinuing use of the technique, they continue to employ another practice that has the same effect.

For those who haven’t read the prior posts, universal default is the practice of credit card companies jacking up your interest rate based on a late payment to another loan or credit card. The practice has met strong resistance from consumer advocacy groups, and Congressional hearings have even been held to pressure card issuers to discontinue the practice.

While there has been some progress in reducing the incidence of universal default, with the major card issuers claiming to no longer use it, many card issuers still enforce policies that raise customers’ rates when their credit score decreases. While a late payment to another loan or credit card is only one reason why your credit score could decline, this policy nonetheless would likely penalize consumers in instances where universal default would have applied. The reason for the rate increase may be slightly different, but the underlying cause is often the same. In fact, raising rates for a drop in credit score is even unfriendlier towards consumers than universal default. At least with universal default, you had to do something wrong, namely pay another bill late. There are many instances where consumers may see their credit scores drop without doing anything wrong. Applying for a mortgage, for instance, may lower your credit score in certain instances.

Chase and Citibank have recently discontinued the practice of hiking interest rates on customers whose credit scores decline, but the practice is still used by other major credit card issuers like Bank of America and Discover. It’s good to see some credit card issuers doing the right thing, but until all of them stop this abusive practice, consumers need to remain aware of its use.

Universal default is just one more reason to apply for a person-to-person loan on Lending Club to pay off your credit cards. In the process, you will enjoy fixed rates and predictable installment payments.