Truth About Credit Cards: Universal Default

Universal Default. Sounds scary, doesn’t it? Well, it is.

When you apply for a loan for a car or a home, there is an agreement between you and the bank over the interest rate. In some cases, the rate is fixed for the life of the loan and in other cases, the interest rate may fluctuate as the prime interest rate fluctuates.

Either way, you do know what your interest rate is and there is an agreement between you and the bank that spells out what it is and how it is figured. Not with credit cards, though.

You may even have a fixed rate credit card, but even the interest rate on that card can change. A credit card is a short term loan, designed to be paid off each and every month. A credit card limit and a credit card interest rate are assigned to you based on what your credit score is at the time that you apply, just like with any other loan.

The difference between a credit card loan and other types of loans is that a credit card company views their terms with you as short terms and can re-evaluate you each and every month if they wish.

How do they evaluate you? They run your credit and look at what your score is doing. Say you applied for a card and had a 750 and landed a 12.9% fixed rate. Pay your payments on time and in full and keep your 750 and there is no problem, but if your score goes down, you have made a change in the terms and the credit card company can raise your rate based on that.

Also, if they give you credit based on a good payment history and find that a year later, even though you have been paying them on time, you have been making late payments elsewhere, they can find that you no longer have a good payment history and raise your rates.

This change in your credit score and payment history is the concept called, Universal Default. You have not made a late payment on your credit card, but a late payment on anything anywhere else, or a drop in your credit score can put you in Universal Default.

All credit card agreements site Universal Default as a justified reason for raising your interest rate, even on a fixed rate credit card. All they have to do is give you 15 days notice before they change your rate and they can raise your rate to whatever they want.