Universal Default: What It Is and How It Works

What is universal default?

Universal default is a clause that appears in some credit card contracts allowing a card issuer to raise the card’s interest rate if the cardholder defaults on any credit obligation. That default can be on the credit card itself or on a separate loan from another lender (for example, a car loan or mortgage).

How universal default typically operates

• If a cardholder defaults on a loan, the card issuer may change the card’s interest rate to a higher “default APR.”
• Historically, issuers could apply the higher rate to existing balances. Today, consumer protection rules limit how issuers may apply those increases (see next section).
• Default APRs can be substantially higher than the regular APR and, in some cases, exceed 30%.

Protections under the CARD Act

The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 restricted how issuers can impose increased rates after a default:
– Issuers cannot retroactively raise the APR on existing balances for past purchases; the higher rate may apply only to new purchases going forward.
– Issuers must provide at least 45 days’ advance notice before applying the increased interest rate.

Why this matters

Because the higher default APR typically applies only to new purchases, cardholders can at least continue to pay off prior balances at the lower rate. However, the restriction does not eliminate the cost of a rate increase — new purchases can become much more expensive, and missed payments may still lead to substantially higher interest charges.

Example

Linda had both a credit card with XYZ Financial and a car loan through ABC Leasing. After she missed a car loan payment, XYZ Financial invoked its universal default clause and notified her of a higher interest rate. Per the CARD Act, XYZ could not charge the higher default APR on her existing credit card balance, but the increased rate would apply to any new purchases after the notice period.

What to do if you’re affected

• Review your cardholder agreement to understand universal default and default APR terms.
• Make at least the minimum payments on all accounts to avoid triggering default clauses.
• If you receive a notice, contact the issuer to clarify what balances and future purchases will be affected and ask about options (rate reduction, payment plan, or hardship programs).
• Monitor your credit reports and dispute inaccuracies.
• Consider credit counseling if you struggle to manage payments.

Key takeaways

• Universal default allows issuers to raise card APRs when a cardholder defaults on other credit obligations.
• The CARD Act limits how increased rates can be applied: higher rates generally cannot be applied retroactively to existing purchase balances and require 45 days’ notice.
• Review card agreements and maintain on-time payments to avoid triggering universal default and the resulting higher interest costs.