Has the Card Act Made Universal Default Illegal?

Universal default is the process whereby a credit card issuer would adversely change the terms of your credit card account because either A) your credit score went down or B) you missed a payment or defaulted on an unrelated credit obligation. If a credit card issuer saw either of these things happen they used to be able to increase your interest rate to the “default” rate (normally around 30%). And, that rate applied to existing and future balances.  In other words it was a retroactive rate increase.

The CARD Act has eliminated some of the aspects of Universal Default but it has certainly not dismantled it completely. In fact, the rumor that Universal Default is gone isn’t even close to being accurate.

First off, a credit card issuer can still legally increase your interest rate, and for almost any reason. As long as the account is over 12 months old the issuer can arbitrarily jack up your rate even if you’ve never missed a payment and have FICO scores in the 800s. This is not illegal.

Additionally, credit card issuers can still review your credit reports and credit scores as often as they like to see if there have been other adverse changes. And, most of them still do so on a monthly basis. This is not illegal.

Finally, while retroactive rate increases are not allowed as they were in the pre-CARD Act days, they certainly have not been eliminated. If you have a credit card with a $10,000 balance and you incurred that balance while your card had a 7.9% interest rate that rate must stay in place UNLESS you go severely delinquent on that card. And, in that case the issuer can, in fact, increase the rate on the existing balance.

There you have it.  Universal Default is still alive and well.  Now, the news isn’t all doom and gloom.  If you want to avoid the problems associated with Universal Default then A) don’t revolve a balance and B) don’t miss payments.

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