Credit card companies have plenty of ways to maximize the amount of interest we pay – after all, it’s how they make money. If you pay a credit card bill late, or not at all, the creditor generally responds by raising your interest rate and imposing fees to that account.
But did you know that a rule called universal default allows creditors to go even further than that? Universal default is a clause, generally disclosed in a credit card account agreement, which states that if you default (meaning you pay late or not at all) on that credit card or to any other lender, the interest rates on any of your credit cards subject to universal default could be raised.
How do they know? Creditors using universal default monitor your credit reports regularly. If your score is lowered for any reason – late or missed payments, excessive debt-to-income ratio, or another reason – the universal default clause can be enforced. This means that even if you’ve never missed or made a late payment to a creditor, that creditor can still raise your interest under the terms of universal default.
Other things can trigger the use of universal default, like going over your limit, having insufficient funds when paying a credit card by check, opening a new credit account or simply having too much debt.
It may sound unfair, but when you open a credit card account and sign the agreement form, you agree to all of the creditor’s terms, even if that includes universal default.
What can you do to prevent universal default from affecting your accounts?
The key to avoid becoming a universal default “victim” is to prevent enforcement of the rule. Here’s what to do:
Always make your payments on time. Better yet, pay your bills as soon as you receive them instead of waiting. Consider paying them online – it’s faster than sending checks through the mail, and many banks now offer this service free to account holders. You can also check creditors’ websites. Many allow you to pay them directly via their sites. Consider using automatic or electronic reminders to keep you on track – you can sign up for these online or by phone. If cash flow is an issue, contact your creditors and ask to have your due dates changed so they fall at a better time for you.
Check your credit regularly. At the very least, you should be checking your credit reports once a year, which you can now do for free – visit AnnualCreditReport.com for details. However, it’s better to check more often, since you can monitor your credit activities more closely. Educate yourself on how your credit report is compiled – Vol. 6 of the Mind Your Finances series, is all about credit reports and scores – check it out. You can also use Credit Compass, available at our website and via the CD Rom included in the welcome package you received when you began your DMP. This fun, interactive program is an excellent way to improve your credit comprehension.
Don’t ignore any mail from your creditors. Think any correspondence from a credit card company that isn’t a statement must be junk mail? Think again. Many credit card companies send customers an annual recap of their credit card terms, and if you ignore all that fine print you might never realize your account is subject to things like universal default. Plus, as universal default increases in popularity, more creditors are adopting it, and when they do, they must inform all customers by mail. So what looks like junk might actually be an important update – which is why you should open any mail concerning your credit cards.
Don’t let universal default sneak up on you – know what it is and how it works so you can protect yourself and your credit!
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