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Universal default is a provision that’s included in many terms and conditions for many credit cards issued in the United States. What is universal default, exactly? This provision in your terms means that your creditor can routinely review your credit report and, if there is any negative change, a higher interest rate can be applied to your credit card in response.
What do creditors look for on your credit report that can trigger universal default?
Here are the most common.
- Going over the credit limit on any of your credit cards
- Being late on any credit card, utility, car payment or mortgage
- Having too high an overall debt percentage
- Utilizing more than 50% of the available credit on any of your credit cards
- Having too much available credit or open credit
- Getting a new mortgage or loan
- Receiving too many credit inquiries
As you can see, almost anything can trigger universal default on your account. What exactly do they want if too much available credit and too much utilized credit are both a bad thing? The purpose of this controversial provision is to grant the creditor a way to protect itself from customers that may become behind on their payments by charging them a higher interest to make up for potential losses.
So what can you do to avoid having your credit card hit with universal default? By far your best choice is to avoid it altogether. Universal default has dramatically decreased in the last couple of years so there’s no reason you should continue to apply for a credit card that includes this provision. If you already have a credit card with a universal default clause, always pay your bills on time. This is your best course of action so make sure a single bill doesn’t fall behind, including magazine subscriptions and utility bills. Basically, any company can report your payment behavior to the credit bureaus who will add it to your credit history file.
Another option if you have one of these credit cards is a balance transfer. If you’re not happy with the terms of your current credit card and fear universal default, find a suitable balance transfer card, preferably one with an introductory 0% APR. Transfer your balance to the new card and then either discontinue use of your old card or close the account. This will also allow you to pay down your debt sooner because interest won’t accumulate as quickly.
In May of 2006 it was estimated that 45% of credit card issuers included universal default provisions in their terms; that number went down significantly over the next couple years. Unfortunately, the tough economic climate we’re currently experiencing could mean a comeback of the universal default clause. Remember, even if your original terms and conditions made no mention of this provision your card issuer can change them at any time by mailing you a notice. Always watch for changes to your terms.