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Beware of credit card universal default clauses

Sounds like something bad that could happen to your car or your computer.

In fact, it’s something harmful that could cost you lots of money and harm your credit rating.

Universal default is a clause contained in the fine print of credit card offers and agreements stating that if you are late with any creditor, you can be considered late with them all.

The result: If you are late in making a payment on a credit card, you will not only be penalized by that card issuer, with a late fee and an increased interest rate hike to as high as 29 percent annually, other creditors who hold your car or installment loans can consider you in default and penalize you in a similar fashion.

More than one-third of major credit card issuers say that they act on these clauses regularly, according to the Institute of Consumer Financial Education in San Diego.

“It catches most people by surprise,” said Paul Richard, the institute’s executive director.

“It’s news to a lot of financial planners and debt counselors.”

It’s news that consumers should know as those holiday bills come rolling in.

If you are late making a payment to a credit card issuer, not only does your interest rate increase dramatically, say from 11 percent to 28 percent, penalty fees can be doubled and your credit limit can be lowered immediately, Richard said.

Thus, a credit card borrower who owes $4,000 on a $5,000 credit line could be told that the credit line had been reduced to $3,000.

To avoid hefty over-limit fees, the borrower might have to pay hundreds or thousands of dollars.

Richard said that one borrower had to come up with $2,400 to get under the limit.

But then the borrower was still stuck with a higher interest rate.

“They’re the lender, and you’re renting their money,” Richard said.

“You have to go by their terms.”

Richard said that universal default hits hardest at those who can least afford it, lower-income borrowers and those with poor credit.

“Your credit score hits the skids,” he said.

He’s concerned that many more consumers will be hurt if the economy takes a downturn and loan delinquencies increase.

Being late on your credit card could raise the rates on your auto loan or on loans obtained to buy furniture or carpet.

If you’re slammed with universal default due to an error, it could be worse to unravel than a case of identity theft, Richard said.

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