Did you know that if you are late making payments on one credit card, it may trigger the increase of your credit card interest rate on another card? Most consumers are not aware of the policy behind this new trend, referred to as a universal default policy.
Universal default policies make it possible for creditors to monitor your credit report, looking for late payments to other creditors. The policy states that if you are late in making payment to one creditor, the credit card company has the authority to rate its rates on your account, even if you’ve never had a single late payment to their particular credit card company. If all your credit cards have universal default policies in their provisions (the small print you skimmed over before signing), your credit card rates can theoretically raise on all your accounts in response to one late payment – even on a totally unrelated account, such as a car payment or mortgage.
Late payments are not the only triggers credit card companies can use to justify raising your interest rates. Under universal default policies, credit card companies can raise your rates if you go over your credit limit on other credit cards (even if you’ve always made the payments on time – this could happen by mistake by simply using the wrong card when you meant to use another one!) They can also decide they feel you are carrying too much debt in general, and by declaring you as a risky borrower, can raise your rates. Other risk factors listed in typical universal default policies are using over half of your line of credit for a specific credit card, having too much credit available or too many trade lines open, making what they consider to be too many credit inquiries on your credit report, or taking on a new mortgage or car loan.
In other words, universal default policies make it possible for credit card companies to declare you as a risky borrower and raise your credit card rates on their individual card if you do anything they consider unwise borrowing.
How many credit card companies have universal default policies? Forty five percent do. That’s almost half of the credit card companies out there.
Why do credit card companies have this policy? The policy was developed to protect creditors from high-risk borrowers. In the past, credit card companies had little recourse with borrowers who may have had healthy credit histories when they first applied for credit, but over time took on more debt than they could handle. This gives credit card companies a way to protect themselves, should they perceive your debt management habits to be less than desirable.
How do you protect yourself as a consumer?
• Read the fine print.
• Don’t sign with a credit card that has a universal default policy.
• Manage your debt wisely.
• Refuse to pay any bill late – ever. Thirty five percent of your credit score depends on you making payments on time anyway.
Hopefully this information will help you avoid the penalties associated with credit cards that use universal default policies.
