Understanding the Universal Default Clause

In the consumer credit world there are few policies more despised than the "Universal Default Clause." This clause allows credit card companies to increase your rates to the maximum default (between 25-30% usually) when you make a late payment or have an issue with any of the accounts on your credit report. Here's the formal definition from Credit.com:

Universal Default Clause: A credit card policy that allows a creditor to increase your interest rates if you make a late payment on any account, not just on their account. For example, your rates could increase dramatically on your credit card if you make a late payment on an unrelated loan. Your creditors track your payment history with other accounts by checking your credit report.

Not all credit card companies use the Universal Default Clause, at last count about half of creditors included this policy. Not sure if your creditors are using the Universal Default Clause? Check the fine print on the back of your last credit card statement or look online for their terms.

The bad news: there's no way to opt-out of the Universal Default Clause and closing your account with the creditor in protest can lower your credit score. If your account does include the Universal Default Clause, you should be extremely careful about avoiding late payments on all your accounts. You also may want to move your balance to a different credit card that doesn't include the clause if you think it's going to be an issue.