Universal default is a term used to describe the process that credit rating agencies use to determine your credit rating. If you default on a loan from a lender or miss several payments, the agency will send your name to all lenders that you deal with even though you make have a perfect payment record with these lenders. It has a serious effect on your credit rating because it results in lowering your credit score and does hamper your borrowing power when lenders see you as a poor risk to repay.
The practice of universal default comes from risk-based pricing in which the interest rate you pay on a loan reflects the risk you pose to the lender as an individual borrower. In this way, those with excellent credit ratings are not subject to higher interest rates that would result if all borrowers were lumped together. Credit card companies are the ones that commonly use this method of determining the rate of interest an individual consumer will pay. The default interest rate is the highest rate usually at 24%, but it could be as high as 30%. Under normal default conditions, a lender will charge a higher interest rate to consumers who default on loans from that lender, but with universal default, a consumer could be charged the higher rate if he/she has defaulted on credit from a different lender.
One of the many criticisms of this policy of charging interest rates is that it resembles price fixing enabling lenders to charge higher than normal rates of interest. It could lead to a person who is in financial difficulty with one account having to declare bankruptcy because of the rising interest costs of borrowing. The structure is arranged so that a consumer paying a high rate of interest on the outstanding balance of a credit card has to repay the balance in full before being able to obtain a lower rate of interest.
Some credit card companies will raise your rate of interest if you miss only one payment. This specification is outlined in the fine print of your credit card agreement, which is why it is important for you to read the fine print very carefully. Many credit card companies regularly raise the rates of interest when customers are as little as one day late with their monthly payment. This doesn’t have to be on a credit card with a high outstanding balance or a car payment. It could be a payment as low as $30 on a hydro bill. You may not even realize that making a payment late could have a drastic effect on your credit score.