VantageScore is one way creditors can understand the risk of working with borrowers.
What is universal default?
Universal default is a policy of some lenders that allows them to penalize borrowers who pay any creditor late, resulting in a drop in the customer’s credit score. Universal default is most commonly used by credit card companies and is disclosed in the fine print of their contracts with customers.
With universal default, a lender changes the loan terms from the regular terms to the default terms. This may include raising a cardholder’s interest rate for making late payments on other debts reported to the credit bureaus. Or, a lender can reduce the customer’s credit limit — even close their account.
The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) of 2009 has softened the effects of universal default by limiting the balances that card issuers can raise rates on. Universal default policies were not, however, ruled out or made illegal by the CARD Act.
Should a card issuer hike a customer’s interest rate, the higher rate will be applied only to new balances. The customer is given 45 days to pay the current debt based on the old agreement.
The CARD Act further states that card issuers can’t increase the interest rate on a balance unless the cardholder has not made any payment after 60 days.
Universal default example
John has two credit cards, an American Express card and a Visa card. He paid for home improvements using his Visa card, but either paid late or failed to pay for several months. The issuer of his American Express card sees John’s lax payment habits and his falling credit score and hikes the interest rate on his card because John is now considered a high-risk borrower.
John goes back and reads the fine print of his credit card agreement and learns about the universal default terms and policy. He now understands how his irresponsible payment habits hurt his credit history and cost him more money. John commits to making on-time payments, repairing his credit score and reading the details of his credit card agreements.
Are you carrying a big credit card balance at a high interest rate? Check out our offers on balance transfer cards.