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Universal default clauses allow credit card issuers and other lenders to raise the interest rate on a person's credit cards all because of a late payment on another credit card or bill. (That's in addition to the fee due on the late payment.)
The demise of universal default would surely be welcome news to cardholders and consumer advocates everywhere, who think it's unfair to raise someone's interest rate to 30% or more because of a single late payment. Back in November, I wrote a piece called, "Is the Controversial Credit Card Universal Default Clause Finally on the Way Out?". Consumer advocates weren't particularly optimistic then about Congress outlawing the practice during what remained of the first session of the 109th Congress.
To find out where things stand for the 109th's second session, which began in January, I spoke to one of the most articulate experts on the subject, Travis B. Plunkett, the legislative director at the Consumer Federation of America (CFA), the largest consumer advocacy group in the U.S., which advances the public's interest through research, advocacy and education. The 300 nonprofits that belong to CFA have over 50 million members between them.
I also re-read Travis's well-researched testimony before the Senate Banking Committee, which held its only hearing on the subject close to a year ago. Travis made many important points about what's wrong with universal default (as well as what's wrong with the many other consumer unfriendly practices that the credit card industry uses). For example:
"The increases are triggered not just by late mortgage or credit card payments to
other lenders but also to other creditors, like utilities or book clubs. ... [Yet] there is little to no evidence that a single late payment to one creditor increases the likelihood of default to all creditors. ... The amount of fees and penalty interest rates do not appear to be proportional to the risk or cost incurred by issuers."
Changing the Deal Is Unfair
Travis also made the important point that in addition to raising interest rates on future purchases, most issuers also
"apply penalty interest rates retroactively to prior purchases. This has the effect of increasing the price on purchases already made (but not paid off). ... There is simply no legal or economic justification for assessing a penalty interest rate to an existing balance. I know of no other industry in the country that is allowed to increase the price of a product once it is purchased. Issuers have already assessed a consumer's risk of not repaying the loan and presumably offered an interest rate based on that risk."
While Travis and other consumer advocates clearly made the case in their testimony to the Senate committee last May - and the public clearly continues to be outraged by universal default - experts remain skeptical about the chances that it will be outlawed.
There are three excellent pro-consumer bills pending in Congress that could help protect us from universal default and other predatory lending practices. Yet all these bills are languishing in committees and no additional hearings have been held. Why? As Travis explains,
"There are few industries in Washington that have more power than the credit card industry, which has had record profits for the last two years. ... The only way this will change is if people contact their members of Congress."
Travis recommends that we all send personalized messages to our Senators and Representatives. Let your legislators know that you think universal default is unfair and should be banned. If you've had to deal with the consequences of universal default and/or other unfair practices, be sure to include a description of your personal experiences.
I don't know about you, but I'm off to send three emails down to Washington. It's the least I can do to help Travis fight the good fight. If you're game, it's easy to contact your elected officials. Click here, then type in your zip code, hit enter, and presto, the names and email addresses pop right up.
Important: Even if universal default is outlawed, there's no doubt that lenders, employers, landlords, and insurers will continue to make their decisions based on our credit reports and credit scores. So always pay your bills on time and be sure to keep your credit report as clean as possible. For some tips, click here.
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