The End of Universal Default

Among the most interesting provisions in the new credit card reform legislation is the end of the controversial practice known as Universal Default.

The legislation, passed in May and set for full implementation next year, banned the practice, which allowed credit card companies to increase interest rates based on factors that had nothing directly to do with a customer’s account.

With Universal Default rules, one creditor could increase the interest rate on a credit card account if a customer failed to make a payment to a different, unrelated creditor. If a person failed to make a mortgage payment, the credit card company could jack up the person’s interest rate on the credit card, even if he were current on his credit card bill.

The practice was seen as unfair by many, allowing a company to change a contract without any failure to perform the duties of that contract. It also was criticized for creating a vicious cycle in which one default led to multiple defaults for a consumer. Advocates have said that every failure to make a payment shows a greater risk to the credit card company for loaning that person more money, and that it is necessary to do to make sure that the charge doesn’t fall on reliable payers.

Good or bad, better or worse, it will be no more. While some provisions are already in effect, the bulk of them are scheduled for February 2010. However, some legislators are trying to move the date up to December 2009.