AFSCME 3357-HOF'S BLOG

What is Universal Default, and Why Should You Care?

If you're like me, you've seen Universal Default provisions pop up in credit cards, you just didn't know what they were called.

A universal default clause in a credit card agreement is a clause that allows the credit card company to jack up the rates to an absurd level even if you are current on their particular card if you are in default on any other account, even with another creditor. Creditors with these provisions routinely scan your credit reports to see if you have any adverse items. If you do - WHACK - your rates go up to at least 26.9%. Since about 25% of all credit reports have a significant error, even folks who pay all their bills on time can run afoul of these clauses.

Not only that, but some of these clauses are written such that if the creditor feels insecure about the debt for any reason (not just late payments) the creditor can jack up the rates. In practice, this means a drop in your credit scores. Credit scores can drop for reasons such as high debt level compared to total credit line, large numbers of inquiries, and participation in a credit management program.

For folks who are trying their best to keep things together, these clauses are often the straw that breaks the camel's back, and make it impossible to pay their debts.

Finally there is some congressional action to stop these clauses. Congressman Dave Obey (Dem. Wisconsin) has sponsored an amendment to the treasury appropriations bill that would ban universal default clauses.

In theory, this type of provision would be a non-partisan way for representatives from both parties to score points with the folks back home. In practice, the lobbyists will be aiming to knock this provision out before it generates much public attention.

The next time you have a client come to you who has been victimized by a universal default clause. Let them know about the Rep. Obey's provision, and let them know that it's going to boil down to a fight between victimized constituents & lobbyists. If your rep. doesn't hear from the constituents, the lobbyists will win.

The press release below is from Congressman Obey's office:


FOR IMMEDIATE RELEASE

CONTACT: Ellis Brachman

Tuesday, June 21, 2005

(202) 225-3365

Committee approves Obey amendment to protect

consumers from abuse by credit card companies

Measure Prevents Companies From Using Non-Related Negative Credit Reports To Raise Interest Rates

WASHINGTON, D.C. - Seventh District Congressman Dave Obey won approval of an amendment in the Appropriations Committee that will prevent credit card issuers from using any unrelated negative information contained in an individual's "credit report" to raise interest rates, unless that negative information was directly related to the individual's account with that issuer.

"Credit card companies are now claiming the right, even if you have never missed a payment to them or been a day late in payment to them, to jack-up your interest rate and charge you a default rate if you have missed a payment or been late in a payment to a party totally unrelated to that credit card company," said Obey, the senior Democrat on the House
Appropriations Committee. "You can have a perfect payment record with all
of your credit cards, and simply forget to pay your phone bill before going on vacation, or run a little late on your utility bill and all those credit card companies can start charging you outrageous 'penalty' rates."

"They shouldn't be able to profit because you were late one-time with your utility bill or your phone bill," added Obey. "My amendment will stop that practice. It simply says that credit issuers can't use any other information other than their history with you to determine what rate you pay."

The amount of credit card debt juggled by a majority of American households has exploded in the past decade. Much of that debt is caused not by consumers borrowing irresponsibly, but by the harsh - and exorbitantly expensive - tactics of the credit card industry.

Once credit card companies have consumers in their grasp, they set up an intricate trap of terms, fees, and penalties to keep consumers in as much debt as possible. One of the most destructive practices credit card issuers employ is the universal default scheme, in which they impose sky-high APRs for late payments to other creditors or a simple drop in credit score.

If retained in the final version of the 2006 treasury appropriations bill, Obey's amendment will prevent companies from using that universal default scheme, and require credit card issuers to clearly and conspicuously describe to consumers the limited use they may make of credit reports.

The bill, which passed committee today, must still be considered by the full House and Senate before it can be signed into law by the President.






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