What is Universal Default?
340 reads · Last updated: December 5, 2024
The term “universal default” refers to a provision found in some credit cards’ cardholder agreements. According to this provision, the credit card company is permitted to increase the interest rate on the credit card if the cardholder fails to make their minimum monthly payment.Importantly, credit card companies can also increase the customer’s interest rate if their customer defaulted on a separate credit product, such as a car loan or a mortgage, even if that other loan was extended by an unrelated lender.
Definition
Universal default refers to a clause in credit card agreements. According to this clause, if a cardholder fails to pay the minimum monthly payment on time, the credit card company has the right to increase the card's interest rate. Importantly, even if the cardholder defaults on other loan products (such as auto loans or mortgages), the credit card company can increase the customer's interest rate, even if the loan is provided by an unrelated lender.
Origin
The universal default clause originated in the development of the credit card industry, aimed at protecting credit card companies from the risk of cardholder defaults. This concept was gradually introduced into credit card agreements in the late 20th century to address the complex situations of multiple debt defaults by cardholders.
Categories and Features
Universal default clauses are typically divided into two categories: direct default and cross-default. Direct default refers to the cardholder's failure to pay the credit card bill on time, while cross-default involves defaults on other loan products. Features include increased interest rates and decreased credit scores, applied when cardholders fail to fulfill their financial obligations.
Case Studies
Case 1: A cardholder defaults on their auto loan, and despite timely credit card payments, the credit card company increases their interest rate due to the universal default clause. Case 2: Another cardholder fails to pay the minimum credit card payment, leading to a rate increase, which adds to their repayment burden.
Common Issues
Common issues for investors include a lack of understanding of the universal default clause, which may lead to unexpected interest rate increases. Misunderstandings may also arise from believing that timely credit card payments will prevent impacts, overlooking the possibility of defaults on other loan products.
