Is the Credit Card Companies’ Universal Default Clause at Risk?
This is a guest post from Randall at Credit Withdrawal, who is pinch-hitting for me as I travel to my cousin’s funeral. Show him some love, and if you like his writing be sure to subscribe to his anti-debt blog as well!
A recent article on the Consumerist Citicard Exec On Ending Universal Default: “It’s Like Telling People You Stopped Beating Your Wife” caught my attention, as did the link it referenced, News From The Swamp: Liveblogging The Senate Permanent Subcommittee On Investigations Hearing On Arbitrary Credit Card Rate Increases. Apparently, our wise leaders in Washington have finally decided that the credit card companies might be doing something naughty with their semi-random rate increases, their ever-increasing penalties, and their FICO score finagling.
From the articles (especially the senate subcommittee one) there is an interesting behind-the-scenes struggle going on between Congress and the big credit card companies to come to a decision on whether the card companies are mistreating their customers. I’m sure it’s fairly apparent to anyone reading this blog what the answer to that question is.
Have You Stopped Beating Your Wife Yet?
From the articles, it appears that Chase and Citicard/Citibank have dropped the Universal Default Clause as a means of sticking it to credit card holders. They are, however, maintaining the magical FICO-triggered rate increase, and the various fees, fines, and penalties.
For those not familiar with a Universal Default Clause, here’s a quick definition.
When a card holder with card A (Visa for instance) fails to pay on time, this is reported on their credit score. This clause allows any other card companies (say card B, MasterCard for instance) that the card holder ALSO has cards with, to raise the interest rate when they do a periodic credit check on the customer, even though they were never late with a payment to card B.
This is one of the worst, and probably most secretive practices of the credit card companies. The fact that a whole domino-chain of credit cards can increase the interest rates for missing ONE payment is bad. For that payment not even being on the card increasing the limits is borderline CRIMINAL.
Why you’re not hearing about Chase and Citicard dropping the rates is because they’re trying to get out of a sticky situation with Congress, by throwing them a bone (dropping the Universal Default clause) but WITHOUT notifying their customers that the clause EVEN EXISTED. That way they won’t get caught with their hands in the cookie jar by their customers.
Even with this concession, there’s a good possibility that Congress won’t be satisfied until some more changes are made. It’s become VERY apparent that the credit card morass that the U.S. is in, is only going to get worse with the existing credit card practices. And with the Subprime bubble, Recession, and other economic problems facing your average consumer nowadays, it’s not healthy for businesses to take advantage of them the way they are used to.
I doubt that even Congress will get the credit card companies to completely reform how they do business, short of an extreme tightening in usury and lending regulations. Other than that, they can grill the CEOs of the various banks and institutions for many less-sweeping changes.
Is THIS a Good Enough Reason to Ditch the Debt?
As if we needed more reasons to dislike credit cards, the hilarious take on the Senate Subcommittee meeting (see above link) illustrates how even the credit card companies can’t always defend their actions. Taken as a whole, credit cards are the albatross around most American’s necks. Getting rid of the cards can put you on a whole new side of life that you probably haven’t seen in a long while. The debt-free side.