New York Says No to Universal Default

The New York Legislature has passed a law banning the use of universal default: the annoying — and expensive — practice by credit card companies of increasing credit card rates on existing balances and new purchases based on other activity on one’s credit report.

Raising interest rates on card balances for non-related financial activity, such as paying a utility or cable television bill late, is commonly referred to in the small print of credit card agreements as "Universal Default."

When I hear from consumers who have been affected by Universal Default, they are angry, and astounded that it is legal. (Some scholars, like Harvard Professor of Law Dr. Elizabeth Warren believe it should be considered a breach of contract).  Consumers who always pay all their bills on time have seen their interest rates skyrocket simply because the card company that approved the credit line in the first place now decides they are “too risky.” This week I spoke to a consumer who felt pushed into bankruptcy when
his card issuer raised his interest rate to 31%. At that rate, he will
never be able to pay off the balance.

"Credit card companies are the only industry in the world to re-price something you already paid for," said Linda Sherry of Consumer Action, a nonprofit organization that conducts an annual survey on fees and rates. Sherry said universal default rates were as high as 29.99 percent in 2004 and have grown to as much as 35 percent this year.

The New York bill is fairly broad, and the impact is not clear at the moment. Out-of-state issuers may be affected, for example. "It will probably be challenged in court," warns Valary Miller, a consumer law attorney and contributor to CreditBloggers.com

You can read the text of the Assembly bill here. We would love to hear your comments on this issue. Have your credit card issuers raised your rates on your outstanding balances? Do you think consumer protection legislation is in order?

Gerri Detweiler Credit.com's Personal Finance Expert, Gerri focuses on financial legislation, budgeting, debt recovery and consumer savings information. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis as well as host of TalkCreditRadio.comTalk Credit Radio. Reach Gerri at creditexperts@credit.com.