Credit Card Abuse: How Universal Default Affects You

You may not be aware of it, but the credit card companies are watching you. Even if you already knew this, they are probably watching more closely than you think.

In addition to watching your every move on their product, they are also watching when you pay your bills, whether or not you apply for other credit cards, and whether or not your credit score has dropped. And if they don't like what they see, they can raise your interest rate without your knowledge.

The practice is called Universal Default. Basically, it means that if you pay any bill late, even your phone bill, your credit card company can raise your interest rate. In fact, they can raise the interest rate up to almost 30%. They can do this even if you have a perfect payment history with them. Credit card companies do this because they now see you as a risk. Higher risks equal higher interest rates.

Up to one-third of lenders have a universal default clause. They keep track of you by periodically checking your credit report. This could occur yearly, quarterly, or even monthly. People with a history of late payments are generally checked more frequently than those with a history of on-time payments.

The practice of universal default has many consumer groups upset. Linda Sherry, of Consumer Action said in a release on the Consumer Action website, "This is the only industry that re-prices something you have already paid for" She went on to note that in 2004, universal default rates were as high as 29.99%. By this year, they may be as high as 35%.

There are a number of concerns about universal default clauses. Perhaps most obvious is the idea that a person's payment history with one company should not affect their interest rates with another, particularly when the two have nothing to do with each other, such as in the case of a phone bill and a credit card bill.

Also troubling is that universal default could easily lead to a vicious cycle in which a person cannot get out of debt because of high interest rates. Adding to that is a problem in which credit card fraud or identity theft often affect an innocent person's credit score. While this can be corrected on a credit report, the creditor has no obligation to return the interest back to its original rate.

On June 22, 2006, New York State became the first state to outlaw the practice of universal default. Consumer agencies hope that other states will follow suit.

There are a number of steps you can take to avoid becoming a victim of universal default. First is to pay your bills ahead of time. A good rule of thumb is to pay your bills when they arrive, rather than waiting for the payment due date. Second is to keep track of your credit score. This will alert you to any mistakes on it and let you see how the credit companies view you.

If you wind up paying universal default rates, there are some steps you can take. A good idea is to check your credit report for inaccuracies and let the credit agencies know about the errors. Another step to take is to phone the creditor and find out why you are being charged universal default rates. Ask about a possible payment plan to lower your interest rate. It may take a while but if you make your payments on time you can eventually get a lower interest rate.

The best advice is to always read the fine print. Don't get stuck paying penalties you don't know about.