What Triggers Universal Default Clauses?
As a follow-up to last week's posts (here and here) on the NY bill that will ban the use of universal default clauses in credit card agreements, I thought it would be interesting to take a look at how the clauses are actually used.
Some of what I found in a 2005 study was to be expected -- for example, universal default policies trigger rate hikes in 90% of accounts when the account-holder's credit score declines.
Other statistics were truly surprising -- for example, the fact that rate hikes under universal default clauses had a 24% chance of being triggered when the cardholder inquired about a car loan or mortgage, and a 33% chance of being triggered because the cardholder getting a new credit card.
On the bright side, banks may be starting to take notice of the public distaste for abusive cross-default clauses. While advance notice of the universal default rate increases is not required by law (and historically has not been given), several large banks in 2005 announced that they would begin giving cardholders advance notice of the rate changes. It's a far from perfect gesture, since many people who get the notice won't be in a position to do anything in response, but providing clear notice to cardholders about what's in store for them is definitely a step in the right direction.
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