Default Rate

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DEFINITION of 'Default Rate'

This rate can be used in reference to two main things:

1. The rate of borrowers who fail to remain current on their loans. It is a critical piece of information used by lenders to determine their risk exposure and economists to evaluate the health of the overall economy.

2. The interest rate charged to a borrower when payments on a revolving line of credit are overdue. This higher rate is applied to outstanding balances in arrears in addition to the regular interest charges for the debt.

INVESTOPEDIA EXPLAINS 'Default Rate'

Prior to passage of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009, the language in some credit card agreements allowed credit card companies to hike the interest charged on the card balance to the default rate even if consumers were current on their account but had an outstanding balance on another credit card (a practice known as "universal default").

The law, which took effect in the fall of 2009 imposed sweeping new restrictions on the credit industry, including the elimination of the universal default rate.

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