Some of you don’t like the fact that I don’t like credit cards. One of my regular readers criticized me for putting too much blame on credit cards. He thinks that the lack of personal responsibility is what causes people to misuse credit cards, not the credit card itself. I agree that personal responsibility is the key to sound money management, but credit cards are a horrible financial product. The universal default provision, which many of you are familiar with, is the best reason why it is such a horrible product.
What is the universal default provision?
It is a clause in many credit card agreements which states that if you are late on ANY credit payments, the credit card company reserves the right to increase your interest rate at any time without notice. Not only will it kick in if you are late on a different credit card, it also applies if you are late on a utility, mortgage, or car loan payment. Your “fixed” interest rate of 9% could increase to 29% in one day if your credit card contains this provision.
Is It Fair?
This is a matter of opinion. On one hand, when you sign on the dotted line to receive a credit card, you are agreeing to all of the terms and conditions of the card. On the other hand, does anyone ever read all of that fine print? Plus, it’s seen as shady and opportunistic on the part of the credit card company. Although, it does make a little sense on the part of the credit card company. You may have had a great credit score in 2005 that allowed you to receive a great interest rate, but now your credit score is 100 points lower for late payments. Shouldn’t the credit card company have the right to charge you more interest since you are a higher risk to them?
Congress and Legislation
Since 2003, Congress has attempted to pass several bills to completely eliminate the use of the universal default provision in credit card terms. Congress views it as a predatory lending practice. So far, Citi Bank and JP Morgan are the only credit card issuing institution to remove their universal default provision. United States Senator, Carl Levin, has given the credit card issuers an ultimatum, either they remove it themselves, or Congress will do it for them. So Far, Bank of America, Discover Card, and Capital One are still defending the provision.
There is a lot of money to be lost for the credit card companies if they lose the battle. I’m not a fan of credit cards for many reasons, and this is one of them. They cause you to spend more money, they tempt you to spend when you shouldn’t spend, and they will take any angle to make more money off of you when possible. If credit card companies ever create policies that benefit the consumer, I’ll consider using them. I know there are many of you out there that make a couple hundred dollars a year by paying for everything on a cash-back rewards program card, but it only takes one wrong move or one personal disaster to allow the credit card company to make their money back from you. Think about it, and feel free to post your thoughts in the comment section.