This is a short series in which we look at some of the deceptive practices favored by credit card companies. These are terms that are often not discolsed until after you’ve already applied and the company has checked your credit report. The items have been mentioned in an article on MSN, and I’m expanding a little on their short summaries.
The first deceptive practice is two-cycle billing, which mostly goes unnoticed until one thinks their card is paid off. Another deceptive practice is what is called universal default.
What is universal default?
This means your card company could raise your rates if you’re late on somebody else’s bill somewhere else. If your credit-history profile changes at all, they can view that as a signal to raise your rates.
Most people to whom this has happened regard this practice as grossly unfair. In some cases, someone may be stuck in an emergency without an emergency fund. They may have no choice but to turn to credit cards to pay some expenses. Imagine for a minute that their emergency is extended or compounded and the credit card bills add up. While it may be a bad decision, this person could choose to pay one card and the expense of letting the other slide for more than 30 days.
Ding! That’s the sound of a negative item hitting their credit report. It may not happen automatically, but if their credit cards participate in universal default, all companies providing credit to this customer will raise their interest rate. In the past, only the credit card or loan with the late payment would apply the punishment.
The companies have basically joined forces to make the most money from the most customers. Universal default allows them to do this, and it is fully legal. You agree to these terms when you open the account, whether you know it or now. In some cases, at the first mark on your credit report, your credit cards will begin charging you their “default” interest rate, which can be 29.9% or more.
That adds up to a lot of money if the customer can only continue to pay the minimum amount or less, no matter what the principle balance is.
The best way to prevent this is to spend less than you earn, save several months’ expenses in an emergency account, always pay your loans on time, and use credit cards only for items you can pay off at the end of the cycle.
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So, I pulled my annual freebie credit report recently and saw over two dozen ‘soft-inquiries’ from Discover card (about one per month). I assume this was A) Checking on universal default, or B) Quickie credit check before they mail me another three pounds of ‘convenience checks’ each week.
Anyone else seen this? Know what it is?
Flexo what a great series of articles to include in your blog. Hopefully lots of people will read them and link to them.
Universal Default seems to me like a nice example of how the rich are separated from the poor—it brings an “all or nothing” aspect to credit card debt.
I understand why credit card companies employ it, but it does seem excessively punitive. Presumably if enough people hate it, then a company will come out that does NOT use it, and everyone will flock to that card. That’s a long-term economist’s view though.
That is absolutely reprehensible, and I had no idea that credit cards were utilizing this practice.
Thanks for the heads up!
When I first heard about this practice I too was enraged, and I’m still not sure I’m in favor of it.
However, since Mr. MoneyDummy has been on the other side of the financial desk, he’s pointed out that there’s often good rationale behind universal default: when people’s credit ratings begin dropping heavily, banks stand to lose if the person goes bankrupt. They raise the interest rates to try to get just a little bit more money before that happens. In many cases, they know they’re never going to get their money back; universal default is an attempt to mitigate their losses somewhat.