Vision Credit Education, Inc.

More and more credit cardholders are reporting that they have experienced interest rate increases on their credit cards in the second half of 2008. In many cases, this is due to no specific fault of their own. The reason is that universal default is making a comeback.

What is Universal Default?

Universal default is a practice of some credit card companies that increase your credit costs if they see signs of weakness on your credit report. In practice, a consumer that falls behind or goes over-the-limit on one credit card account could experience interest rate hikes and reduced credit limits on their other credit card accounts, even those issued by other creditors.

Why Did Universal Default Disappear?

Universal default was phased out by credit card companies in 2006. They did this during a period of increased Congressional scrutiny of credit card practices.

Congress debated increasing regulations imposed on credit card issuers. The major credit card companies instead tried to prove to Congress that they could police themselves, and that more regulation was unnecessary.

The major component of universal default is the “any time for any reason” right to increase rates or reduce available credit to a cardholder. Members of Congress wanted to outlaw this practice. As a result of these discussions, credit card issuers voluntarily stopped universal default practices in 2006.

Why is Universal Default Returning?

Universal default is returning to credit card agreements for two primary reasons:

1. First, credit card issuers are facing mounting losses from credit card defaults. In addition, many of these firms are also experiencing other subprime credit losses that further hammer profits. Credit card issuers are trying to stop the bleeding, and these increases in revenues should offset some losses.
2. Congress is allowing considerable latitude among financial institutions following the collapse of several commercial and investment banks. Credit card issuers are betting that Congress will allow for such practices in the interim until financial markets stabilize and begin their recovery.

Most credit card issuers are bringing back some form of pricing increases, whether specifically through universal default pricing or through across the board changes. Already, American Express, Bank of America and Citibank have begun raising rates of cardholders regardless of consumer behavior.

If you have a credit card account, you may or may not see an interest rate increase as a result of these changes. They are not necessarily affecting all card accounts by these issuers. However, if you have shown any signs of distress on one card account, you should be prepared for subsequent reactions from your other credit card issuers. Universal default will likely raise your interest rates and increase your minimum payments, possibly beyond what you can reasonably afford!