Todd Ossenfort: Fixed Rate Credit Cards and the Universal Default Clause

According to many credit card agreements a universal default clause can inflate your interest rate if the issuer believes you are a credit risk.

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April 18, 2013 - Todd, we had a credit card with a fixed rate for the life of the card and we paid more than the payment due and on time. Then out of the blue our rate was increased to 21 percent. When I called to question it, I was told it was raised due to high balances on other cards we had, which are also paid more than payment due and on time E4CKABT5K8V9.

The fixed rate on the card was 7.99 percent so when the rate was raised it was a big jump. Why did they say fixed for as long as you have the card and keep the payments up?

Also they advised us to close the account in order to give us back the 7.99 percent on the balance owed to keep the payments up to date and in six months time they would do a credit check and if they find it necessary they can up the rate again. Sweetadeed.

Todd Ossenfort's Response:

Dear Sweetadeed:

You have become the victim of a clause in some credit card agreements called Universal Default. To boil down the clause it basically means that the card issuer can review your credit and if it believes you have become an increased credit risk, your interest rate can be raised. The addition of the clause to your agreement, which you signed, allows the creditor to raise the “fixed” rate.

A late payment to any of your other creditors, an increase in credit balances, opening significant additional lines of credit or going over the credit limit on an account can all trigger the universal default clause. The good news is that many consumers have complained about this practice and now not all credit card issuers include the universal default clause in their agreements.

If you cannot afford the increased payment at 21 percent, I recommend that you go ahead and close the account and get your interest rate back to the 7.99 percent. After you have accomplished that, it would be a good idea to begin searching for a different credit card that does not include a universal default clause in the cardholder agreement. As you found, the lowest interest rate card may not always be the best deal if the creditor includes a universal default clause.

Check (link to page) for cards that would provide you with a low interest rate, allow you to transfer the balance from your old card and that does not include the universal default clause. Some credit card issuers will even waive the balance transfer fee for new customers.

I would also encourage you to take a look at your other card agreements and determine if they include a universal default clause. If so, you might consider moving those balances as well.

One word of caution: part of what is included in the calculation of your credit score is the length of time you have had credit. If you do decide the move balances from cards that you have had a long time, don’t close the accounts or it may negatively affect your credit score.

Take care of your credit!

Todd Ossenfort