DEFINITION of 'Universal Default'

A practice whereby a credit card issuer increases a credit card holder’s interest rate if he or she is late making a minimum payment on any debt that is reported to the credit bureaus. Universal default means that if Jenny has a Visa card and a Discover card and she misses the payment deadline on her Discover card, her Visa card issuer might increase the interest rate on her Visa card. Her Visa card issuer might even increase her rate if it learns Jenny was late paying her car loan.

BREAKING DOWN 'Universal Default'

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) changed many rules credit card companies must follow, and one of those rules made universal default less severe by restricting the balances on which card issuers can increase a consumer’s interest rate. Because of the act, issuers can’t increase the rate on your existing balance unless you are 60 days delinquent on that account. However, the CARD Act did not eliminate universal default or make it illegal, and issuers can decide to increase your interest rate on future charges.

To understand when your credit card rate can go up, by how much and for how long, read the card’s terms and conditions. Specifically, read the section on the penalty rate, also called the default APR. This section will describe the interest rate that may go into effect if you pay late. For example, a card might have a penalty APR of 29.99% variable, based on the prime rate, that goes into effect if you make a late payment or if your payment is returned unpaid. The penalty rate may apply indefinitely.

Credit card companies routinely check their customers’ credit reports to look for signs that a customer has become riskier to lend money to. If they find signs of increased risk, such as a late payment on another account, they might choose to reduce a customer’s credit line, charge the customer a higher interest rate or even close the account. Card issuers are trying to make sure they don’t lend money that won’t be repaid, and they charge customers based on how much of a credit risk they pose. This is the justification behind universal default.

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