Universal Default

[poundwise]

Just a friendly bit of education for anyone who may not understand universal default:

"Everybody knows credit card companies check your credit report when you apply for a card. What you might not know is they keep checking your credit even after issuing you a card. They say they want to make sure you don’t become a big credit risk.

Here’s what that means to you. If you have problems with one of your credit cards — miss a payment, pay late, or go over your limit — you could see rates skyrocket on your other cards. This is known as the “universal default” provision and it’s used by about half the credit card companies. I’ve seen a default interest rate as high as 30 percent. Ouch!

This interest rate, which can be two, three, even four times as much as you had been paying, boosts your minimum monthly payment and puts you deeper in the hole.

And that new, higher interest rate isn’t limited to new charges. It’s retroactive, so you’ll pay it on your existing balance, which you originally charged at the lower rate."

Source: ConsumerMan - MSNBC.com

[Raisecapital01]

That makes a lot of since. Credit card companies have to monitor risk. It is a business of financing money.

[neatdesign]

Sure, they have to monitor risk. But there's risk and then there's RISK.

In my opinion, the biggest problem with universal default is that it is basically a 0% tolerance approach. It does not take into consideration the fact that things happen in life which may cause a person to miss a payment or go over their limit, but doesn't make that person a credit risk.

Let me give you two examples:

EXAMPLE ONE: Let's say you have two credit cards, one with Creditor A and one with Creditor B. Both practice universal default. One month, you send Creditor A a payment of $50 to cover your minimum payment. While the payment posts on time, there is a processing error and Creditor A misapplies your payment to someone else's account. Totally not your fault. Creditor A acknowledge their error, corrects it, credits the late fee, etc.

EXAMPLE TWO: You have already made your minimum payment to Creditor B, but the day you get your bill from Creditor A, you get into an accident and are hospitalized. Your injuries keep you in the hospital for several weeks, after which you return home but are still recovering. During all this chaos, you neglected to make your payment to Creditor A on time. However, once the dust settles you call up Creditor A, explain what happened and they agree to waive your late fee and remove the late payment history from your credit report. Problem is, Creditor B has already gotten wind of your late payment, so your APR on that account skyrockets.

Do you think Creditor B will know that your payment to Creditor A was, in fact, NOT late? Or that you were seriously injured and missed your payment because you were in the hospital? No, they won't. Do you think Creditor B will care and reverse the increase in your APR that was triggered by universal default? Maybe, but not without a lot of hassle on your part, and even then they could still refuse.

~ Jenney

[PRICEPLUS]

Any way you look at it Universal Default is abysmal! It is illustrative of just how bllod thirsty CC companies have become!

To me, universal default is a completely legitimate business practice the credit card industry has adopted in order to demonstrate its appreciation for the customer.

I have therefore acted in what I feel to be the appropriate manner to demonstrate my appreciation for them (or lack thereof).

[Elgin526]

Originally Posted by Raisecapital01

That makes a lot of since. Credit card companies have to monitor risk. It is a business of financing money.

This would be true if the only applied the new higher rate to future purchases. But they also apply it to any balance you already have. You borrowed that money at a lower rate, when the precieved risk was lower. The CC's companies decide, rightly or wrongly, that you are now a bigger risk and increase your interest rate on money they already loaned you.

It would be like if your mortgage company decides that since you were later on your car payment last month, they'll raise your interest rate on your mortgage a couple of points, since you are now a greater risk. They can't, because it's against the law for banks to do that. It's not illegal for the credit card companies, so they of course do it.

The ironic thing about all of this is that anyone that is late on a payment is likely having money problems. Jacking up the juice to 30% is only going to make their money problems worse, and lessen the likelyhood of the CC company getting paid!

[SavedintheCity]

Originally Posted by Elgin526

It would be like if your mortgage company decides that since you were later on your car payment last month, they'll raise your interest rate on your mortgage a couple of points, since you are now a greater risk. They can't, because it's against the law for banks to do that. It's not illegal for the credit card companies, so they of course do it.

Not entirely accurate. Mortgage companies cannot change the rates on your mortgage promissory note, because the promissory note cannot be amended without the signed consent of all the parties (that is if you have a fixed rate mortgage). Moreover, MANY, MANY promissory notes do have something similar to "Universal Default". However, mortgagees have different remedies than CC companies. A very common Default provision of a promissory note will have Default defined to include: failing to pay any and all other debts as they become due (which is actually the legal definition of Bankrupt). So, if your mortgage company learns that you defaulted under a credit card agreement, they too may decide that you have defaulted under your mortgage and could call the mortgage. The reason more mortgage companies do not seek to foreclose when a person gets into bad cc debt is due to the cost of foreclosure and the secured position of the debt. Even if you go into bankruptcy, the mortgagee usually has first "dibs" on your house to satisfy its credit. Because few banks will lend you more than 80% of the purchase price of a piece of real property, they figure that most of the time they can recoup the full amount of the credit in bankruptcy. Also, most folks will eat dirt before failing to pay their mortgages, so banks feel very secure and rarely invoke the "Universal Default" type provisions of mortgages. Just don't be lulled into a false sense of security because it's a "mortgage", it's a debt similar to any other, and the creditor usually holds most of the cards.

[Elgin526]

Originally Posted by SavedintheCity

Not entirely accurate. Mortgage companies cannot change the rates on your mortgage promissory note, because the promissory note cannot be amended without the signed consent of all the parties (that is if you have a fixed rate mortgage). Moreover, MANY, MANY promissory notes do have something similar to "Universal Default". However, mortgagees have different remedies than CC companies. A very common Default provision of a promissory note will have Default defined to include: failing to pay any and all other debts as they become due (which is actually the legal definition of Bankrupt). So, if your mortgage company learns that you defaulted under a credit card agreement, they too may decide that you have defaulted under your mortgage and could call the mortgage. The reason more mortgage companies do not seek to foreclose when a person gets into bad cc debt is due to the cost of foreclosure and the secured position of the debt. Even if you go into bankruptcy, the mortgagee usually has first "dibs" on your house to satisfy its credit. Because few banks will lend you more than 80% of the purchase price of a piece of real property, they figure that most of the time they can recoup the full amount of the credit in bankruptcy. Also, most folks will eat dirt before failing to pay their mortgages, so banks feel very secure and rarely invoke the "Universal Default" type provisions of mortgages. Just don't be lulled into a false sense of security because it's a "mortgage", it's a debt similar to any other, and the creditor usually holds most of the cards.

True, they can call in the loan, but all that means is that you either have to sell your house to pay off the debt, or come up with the cash to pay off the loan (which if you're late on other bills, chances are you don't have). But they can't just raise your interest rate because you missed a single car payment, and like you said, you'd have to be on the verge of bankruptcy before they called the loan in anyway, the likelyhood of them foreclosing on your house for being late once or twice on another account has to be almost zero. CC companies, on the other hand, don't call in the loan. They just double or triple your interest rate should you be late on ANY account that gets reported to the credit bureaus.

Originally Posted by Elgin526

This would be true if the only applied the new higher rate to future purchases. But they also apply it to any balance you already have. You borrowed that money at a lower rate, when the precieved risk was lower. The CC's companies decide, rightly or wrongly, that you are now a bigger risk and increase your interest rate on money they already loaned you.

you did not borrow money


you were extended a line of credit, what you did with it was your business.


if the factors that went into making that credit decision change, the terms of the line of credit change.


I like Elizabeth Warren but on that particular one of her talking points, I just have to disagree.


I imagine at some point they'll start passing laws and setting regulations to limit that kind of stuff but it won't be to "protect you" or to "champion the little guy." it will be because it has gone too far to the other side and it is starting to scare people away from credit. and that's something this economy doesn't want, I don't care who's in power.

[Elgin526]

Originally Posted by rexdart

you did not borrow money


you were extended a line of credit, what you did with it was your business.


if the factors that went into making that credit decision change, the terms of the line of credit change.

I fail to see the differance. Asside from being unsecured, I see no differance between credit card debt or a mortgage or a car loan. You've borrowed money and agreed to pay it back with interest.

Credit card companies are the only lenders I've ever heard of that can change the terms of the loan after the fact, for any reason they choose, or no reason at all. Now, this is perfectly legal and we agree to it when we apply for the card (even though most people can't understand the fine print but that's a thread for another day), but just becase they are allowed to do it, it doesn't make it ethical, or even a good idea from a buisness standpoint. A person is having trouble paying what they owe, so your going to increase their debt and make it even harder? That doesn't sound like good business to me. I'd want to do everything I could to make sure I got paid, not kick my customers while they're down!

[SavedintheCity]

Originally Posted by Elgin526

I fail to see the differance. Asside from being unsecured, I see no differance between credit card debt or a mortgage or a car loan. You've borrowed money and agreed to pay it back with interest.

That doesn't sound like good business to me. I'd want to do everything I could to make sure I got paid, not kick my customers while they're down!

You are completely right on the first count. It is a debt, period. Nothing is different other than the security you posted to get the debt.

On the second count however, you are mistaken. It makes PERFECT business sense. If you are having trouble paying your bills, creditors want to increase their INDIVIDUAL stake in your carcass as much as possible, without ACTUALLY providing you any more credit. How does a company do this, by increasing the interest charges and squeezing every last late fee, attorney fee, administrative fee they possibly can out of the debtor. From a business standpoint it is all upside; the CC company did not loan you any more money, but was able to extract more from you for PAST loans. Especially now with the debt testing in Chapter 7s, forcing many with high CC debt to go into Chapter 13s, it is all to the CC company's benefit to up the ante as much as possible without increasing its risk. (In Chapter 13's unsecured debt is not liquidated, but you enter into a court ordered payment plan with ALL your creditors so ALL creditors will get most of their dough back). CC company's are not in business to help support you, they are there to make as much money off of your beehind as they can, legally. It is not a charity; they do not care if they make or break you. The only interest they have is to have any possible reason to up the Vig. If you give them that reason, they will, whether you go into bankruptcy or not. Remember, thanks to the Bankruptcy Reform Act CC companies now have many, many advantages in bankruptcy that weren't true a few years ago. Universal Defaults will become more common, not less.

Nothing is different other than the security you posted to get the debt.

of course there's a difference

one situation is a collaterally secured loan, the other is credit.

a mortgage or car loan is not credit, it's a trade, some money for rights to property.

now if you got a credit card for a single purchase and it was never used for anything else, you paid it off and the account was closed, then you have a case but the credit extension is valid for virtually anything you want to use it for, uses not disclosed by you when you get the credit line (limitations of the issuer notwithstanding).

what would happen if the AVERAGE consumer went to a bank and told them they want several thousand dollars to use for food and clothing, maybe some electronics, a couple trips to Europe and maybe some other stuff over the next 10 years with no security whatsoever? I doubt they'd leave that bank with any more money than they walked in with.

remember, I am no fan of the credit card industry, I think credit is given too freely to people who almost need to be protected from themselves but I just don't have a problem with the changes in interest rate based on the behavior of the consumer.

I'm guessing next we should insist that an increase in a savings account's interest rate only be applied to the money deposited after the increase, the amount in the account should only continue to earn interest at the rate that was effective at the time it was put in.

yeah, that doesn't sound foolish at all.