What is Universal Default?

If you’ve ever read the fine print of your credit card agreement, then there’s a pretty high likelihood you’ve run across the term “universal default.” But do you actually know what it means?

In short, a universal default clause states that if you’re late on a payment to any creditor and your card issuer finds out about it, they can change the terms of your agreement from the normal terms to the default terms. In other words, if Bank A learns that you’ve defaulted with Bank B, then Bank A can treat you as if you’ve defaulted with them, even if you haven’t. In practice, this means that they can jack your interest rate up sky high — on average, default interest rates are in the neighborhood of 24%.

While proponents of this practice argue that the increased rate is necessary to offset the increased risk associated with lending you money, universal default can have dire consequences for someone who is struggling to keep their head above water. Indeed, even if such a person is current on the majority of their payments, defaulting with one lender can trigger rate increases with other lenders, causing the customer to fall behind across the board.

While there has been a lot of talk about restricting “abusive practices” such as universal default, these efforts have generally gone nowhere fast. However, in 2007, Citibank became the first bank to voluntarily eliminate their universal default provision.