San Diego, CA. Universal default? What is that? That kind of reaction is typical among consumers, who are largely ignorant of the latest consumer credit trap known as universal default until it effects their pocketbooks, says the nonprofit Institute of Consumer Financial Education (ICFE) an award winning, tax exempt, education foundation based in San Diego, CA. Since 1982, the ICFE has been helping consumers of all ages improve their spending practices and habits, increase their savings accumulation and use credit more wisely and also speaking out against universal default.
Universal default is a not-so-new term for lenders and credit counselors, however it is a new problem consumers are facing more often than ever before. A Universal default clause is one of those fine print items buried in many, if not most, credit card agreements. It comes into play when a consumer, who otherwise has excellent credit (and also a high credit score), suddenly has a negative item appear on their credit report. When negatives begin to appear on a report, the universal default clause is often invoked. Essentially it means if you are in default with one lender, you are in default with us too.
The Office of the Comptroller of the Currency (OCC) recently labeled the practice as "unacceptable" for national banks. In an advisory letter sent to over 2000 national banks and 51 federal branches of foreign banks in the U.S. the OCC charters, regulates and examines warned those that issue credit cards that "certain practices in connection with repricing credit card accounts and changing terms of credit card agreements may raise heightened compliance and reputation risks."
The OCC stressed in its alert that national banks should not:
"Fail to disclose fully and prominently in promotional materials the circumstances under which the credit card agreement permits the bank to increase a consumer's annual percentage rate (APR) (other than due to a variable rate feature), increases fees, or take other action to increase the cost of credit, such as failure to make timely payments to another creditor."
The result of the so-called universal default clause is the low interest rates enjoyed at the outset of a credit relationship with a lender, will soar and, in more than a few cases, they may double or triple. Creditors and lenders are now more closely monitoring credit reports of their current clients for signs of trouble, especially with other lenders.
Missing or being later on a payment, even to the phone company, a book or music club, can be very costly if it makes it on to your credit report. It is now much more than a $30 or $40 late payment fee, because not only does it trigger higher fees and interest charges, it will also lower credit scores. The ICFE is receiving calls everyday from distressed consumers complaining the interest rates on their credit cards have shot up, seemingly without explanation or notice from their lenders. They all want to know why and what they can do about it.
Anne Wight, an ICFE Certified Credit Report Reviewer, who serves in the U. S. Air Force as the family support specialist with the Air Mobility Command at Scott AFB in Illinois wrote to Military Money magazine about the problem it presents for military members and veterans.
"Universal default needs to be explained to our military families and also needs to be ruled illegal through consumer advocacy. Senior citizens who happen to misplace one bill (or simply forget to pay one on time) are being penalized, young and old alike who suffer from anxiety and/or depression and hide bills during their crisis times are being penalized, and many military members who are deployed or TDY and either miss one payment or pay late are being penalized! Consumers need to be accountable for the one bill that was missed or late, but not be required to pay higher interest rates by all creditors who employ "universal default" based on another lender's experience," Ms. Wight said.
Until things change in credit card agreements, based on the OCC's declaration that it is unacceptable, consumers are encouraged to read carefully the rate, fees and other cost information included with the credit card offer. It usually appears under a section titled: Other APRs. Listed among them are the cash advance rate, the default rate, the closed account rate and the overdraft advance rate. It is the default rate that needs more examination. ICFE advises consumers not to sign any credit card agreement that includes a universal default condition.
Bank One's, Terms & Conditions explanation on a credit card offer with a 7.99% fixed rate reads: "Your APRs may increase if you default under any Cardmember Agreement you have with us for any of the following reasons: we do not receive at least the minimum payment due by the date and time due as shown on your billing statement for any billing cycle for which a payment is owed, you exceed your credit line on this Account, you fail to make payment to another creditor when due, you make a payment to us that is not honored by your bank."
If you are already using a credit card that has a universal default clause in the Cardmember Agreement, prevention is easy. Pay all your monthly obligations, at least a week or more ahead of the payment due date. Many lenders and service suppliers, such as utilities, are placing reminder notices in or on their customers monthly statements. They encourage consumers to have payments reach their offices, not on the due date, but in time to have the payment processed and posted to an account before the due date.
Fixing it is not so easy. Once a negative hits a credit report, the damage is done. To get it removed, a consumer must convince the creditor the problems lie elsewhere and that the consumer is not at fault for a payment being recorded as late. Usually consumers lose this argument, unless they send their payments certified mail and can actually track the date of receipt. Absent any sort of proof your payments were delivered on time to the creditor, consumers will be paying higher interest rates and other fees, perhaps for years to come.
If you are experiencing difficulty with your credit record or making all of your payments on time, there is help available on spending, credit reports, credit scoring and credit repair from the ICFE online at www.icfe.info.
To receive the same information by mail, please send $1 and a 60 cent SASE to: ICFE PO box 34070, San Diego, CA 92163 and request the information.
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For more information contact: Paul Richard, RFC - Executive director @ 619-239-1401 or eNews@icfe.info
The full text of the OCC's alert to national banks is below:
OCC Alerts National Banks on Unacceptable Credit Card Marketing and Account Management Practices
WASHINGTON --The Office of the Comptroller of the Currency (OCC) provided guidance to national banks today on three specific credit card practices that the OCC regards as unacceptable because they may constitute unfair or deceptive acts or practices, or could otherwise expose a bank to compliance and reputation risk.
The OCC expressed concern about practices in which the cost of credit to an individual cardholder is increased without adequate disclosure of the circumstances that would trigger an increase or the creditor s right to change the terms and conditions of the card.
The second practice that the OCC addressed involves the marketing of cards by promoting credit limits up to a maximum amount that, in reality is seldom extended. The third practice involves the use of promotional rates in solicitations without clear disclosure about significant restrictions on the applicability and continuation of those rates.
The OCC expects that customers be given adequate information and fair choices in the selection of credit products, said Comptroller of the Currency John D. Hawke, Jr. In the event the OCC finds a national bank engaged in these practices, it will take all appropriate supervisory action necessary to address the matter.
In the advisory letter issued today, the OCC noted that repricing of credit card accounts and other changes in credit terms may be appropriate measures for managing credit risk on the part of the credit card issuer. However, certain practices in connection with repricing credit card accounts and changing terms of credit card agreements may raise heightened compliance and reputation risks. The OCC stressed that national banks should not:
Fail to disclose fully and prominently in promotional materials the circumstances under which the credit card agreement permits the bank to increase the consumer s annual percentage rate (APR) (other than due to a variable rate feature), increase fees, or take other action to increase the cost of credit, such as failure to make timely payments to another creditor.
Fail to disclose fully and prominently in marketing materials and credit agreements that the bank reserves the right to change the APR (other than due to a variable rate feature), fees, or other credit terms unilaterally.
The OCC also noted that promotions for credit cards with credit limits up to a specified dollar amount can be appropriate and beneficial to customers when the amount of credit offered is genuine, and not essentially illusory; when a meaningful number of pplicants receive a significant credit line; when material information about the cost and usefulness is clearly and conspicuously presented; and when disclosures are made in accordance with Regulation Z. In this area, the OCC advised national banks that they should not:
Target consumers who have limited or poor credit histories with solicitations for credit cards, with maximum, or up to, credit limit that is far greater than most of these applicants are likely to receive.
Provide most applicants with a default credit line (the lowest credit line available) that is significantly lower than the maximum amount advertised, while failing to disclose fully and prominently in the promotional materials the default credit line and the possibility that the consumer will receive it.
Advertise the possible uses of the card when the initial available credit line is likely to be so limited that the advertised possible uses are substantially illusory.
Promotional rate solicitations involve representations that an applicant or current cardholder may for a limited time receive a reduced APR on certain credit card charges or transactions. The reduced APR generally will be in effect only for a specified number of months and may be subject to other material limitations. In addition, other features of the promotion may limit the consumer s ability to benefit from the program and problems may arise if material terms are not appropriately disclosed in promotional materials. With respect to these practices, the advisory indicated that national banks should not:
Fail to disclose fully and prominently in promotional materials and credit agreements any material limitations on the applicability of the promotional rate, such as the time period for which the rate will be in effect and any circumstances that could shorten the promotional rate period or cause the promotional rate to increase.
Make representations that create the impression that material limitations regarding the applicability of the promotional rate do not exist.
Fail to disclose fully and prominently in promotional materials and credit card agreements any fees that may apply in connection with the promotional terms.
For information from the OCC about NR 2004-80 Contact: Kevin Mukri - (202) 874-5770
The OCC charters, regulates and examines approximately 2,000 national banks and 51 federal branches of foreign banks in the U.S., accounting for more than 56 percent of the nation s banking assets. Its mission is to ensure a safe and sound and competitive national banking system that supports the citizens, communities and economy of the United States.