Definition
Universal default is a condition established by a clause in most cardholder agreements where a creditor can declare you an increased credit risk. This universal default clause provides creditors justification to increase your interest rates or reduce your credit limits when you show distress in any credit account.
Analysis
A universal default clause was included in most new cardholder agreements after 2004. Existing cardholder agreements were also modified so that creditors reserved the right to invoke risk-based pricing.
Credit card companies would frequently conduct an account review inquiry to determine if there were any signs of financial weakness. Affected cardholders might experience interest rate hikes of several percentage points. Additionally, their credit limits could be reduced.
In 2007, some key members of Congress pressured credit card companies to voluntarily relax universal default policies. Many major creditors complied, and accordingly no major credit card regulations were enacted.
