Universal Default
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.
Universal Default
Definition: Universal default is a clause found in some credit card agreements. According to this clause, if a cardholder fails to make the minimum monthly payment on time, the credit card company has the right to increase the interest rate on the credit card. Importantly, even if the cardholder defaults on other loan products (such as auto loans or mortgages), the credit card company can raise 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, particularly in the late 20th and early 21st centuries, as credit card companies introduced this clause to reduce risk and increase revenue. As competition in the credit card market intensified, companies began to seek more ways to protect their interests, leading to the emergence of this clause.
Categories and Characteristics
There are mainly two types of universal default clauses:
- Standard Universal Default Clause: If the cardholder fails to make the minimum monthly payment on time, the credit card company has the right to increase the interest rate.
- Cross-Default Clause: If the cardholder defaults on other loan products (such as auto loans or mortgages), the credit card company can also increase the interest rate.
The characteristics of these clauses are that they give credit card companies greater flexibility and power to respond to cardholder defaults.
Specific Cases
Case 1: Mr. Wang holds a credit card but fails to make the minimum monthly payment on time due to financial difficulties. According to the universal default clause, the credit card company raises his interest rate from 15% to 25%. This further increases Mr. Wang's repayment pressure.
Case 2: Ms. Li has a credit card and an auto loan. Due to unemployment, she fails to make the monthly payment on the auto loan. Although she pays her credit card bill on time, the credit card company raises her interest rate from 12% to 20% based on the cross-default clause.
Common Questions
Q: Does the universal default clause apply to all credit cards?
A: Not necessarily. Not all credit card agreements include a universal default clause. Cardholders should carefully read the relevant terms when applying for a credit card.
Q: How can one avoid the impact of the universal default clause?
A: Cardholders should strive to make timely payments on all loan products to avoid any form of default.
