The Credit Card Act of 2009 banned the practice of universal default, but there are some loopholes
Dear Credit Guy,
If you fall delinquent on one credit card bill, can the interest rates on any of your other cards go up? Or is that an old practice? – Cindy
What you are talking about is a practice called “universal default,” and it is true that this practice was prevalent before the Credit Card Act of 2009.
Prior to that, credit card companies could, in fact, raise a consumer’s interest rate due to late payments on a different credit card, even if the consumer had never been late on the other card.
The Credit Card Act of 2009 basically banned this practice, at least in the circumstance you are asking about.
However, there are some circumstances in which a small-scale version of universal default can still come into play.
Most notably, this can happen if you have multiple credit cards with the same company and are late on one of those cards. In this instance, the creditor could raise your rate on the other cards you have with that issuer, even though other creditors cannot. So it’s not universal, but it can still hurt.
Allowed conditions for APR increase
The Credit Card Act of 2009 clearly states when credit card issuers can increase their interest rate. Rates on existing balances can only be raised under the following conditions:
- An account becomes 60 days late.
- An introductory rate expires.
- The index rate on a variable annual percentage rate (APR) card increases.
- The consumer defaults or completes a debt management plan.
- Military service members end active duty (federal law caps credit card APRs for service members at 6 percent as long as they are on active duty).
Variable APRs are rising
Let’s talk a little bit more about the third and fourth conditions. Regarding variable APR increases, it is important to note that most of the credit cards on the market today carry a variable APR.
You may not have seen many increases in recent years because interest rates had not increased for some time, but that has begun to change. When interest rates rise, the interest rate on any credit card you have that carries a variable rate will likely also be increased.
Debt management plan details
As for debt management plans, the way these plans work is to generally lower a consumer’s interest rate for the duration of the plan. If a consumer drops out of a DMP, the interest rates will revert to the original rates before enrollment.
Likewise, once a plan is completed and the account is paid off, the creditor is under no obligation and generally will not continue to offer the DMP rate for future purchases, even if the account was not closed upon enrollment.
Video: How payment history affects your credit score
Existing balances only
Note that these rules apply only to existing balances. You need to know that your credit card issuers do have the right to increase your interest rate on future purchases any time for any reason with a 45-day advance notice.
You do have the right to opt out or refuse this increase. If you do that, however, your card will likely be closed to future purchases.
Pay attention to notices regarding these increases, because the increase can automatically apply to any purchases made 14 days after the notice has been mailed. This can apply even if you later opt out of the increase.
Take care of your credit!
See related:12 consumer protections in the Credit CARD Act