Among the most controversial--okay, let's use plain language and say sleazy--practices of credit card issuers in recent years is that of "universal default," a policy of raising rates on a holder of one card for being late on payments on another card or loan. The justification for this was that being late on any loan is a sign that a customer was a poor credit risk. This is true. It is also, unfortunately, made even more true when someone who is already floundering faces ever rising rates.
I recently got an unappealing offer from Bank of America, one of the credit card issuers with whom I have managed to keep a vertigo-inducingly high balance, suggesting that if I wanted to keep using the card I could do so at the modest interest rate of 22 percent. I said no thanks--the current rate of 8.74 seems a lot more attractive, and I'll just stop using it and keep paying it off at that rate. Most writers on money do not carry big credit card balances (and good for them!) and if they do they don't pay their bills late anyway. To this I am an exception; you can file that under "the shoemaker's children," or just give me a pass because I hardly ever feel like I'm in a position to give other people financial advice. My bad management of my own affairs does have the advantage that it gives me a view of credit card practices that few people who write on this subject have.
From my front row seat it's clear that not only are the card issuers shying away from universal default, but they are much, much less ready to raise rates for any reason than they were a couple of years ago. The letter from Bank of America was the big exception: with a half dozen cards at their limits and a series of late payments on a loan, other issuers have not tried this tactic on me. You might think that this indicates that they are bowing to public pressure, but I suspect that there's plenty of self interest involved. Universal default, injurious as it is to cardholders, is ultimately even worse for issuers. If anybody has forgotten the notion of a "run on the bank," then what's happened on Wall Street is a good reminder.
Raising rates is a bid to get the last bit of money from a borrower in trouble before he defaults. And of course it makes a default much more likely. Borrowers racing to pay off one card on which the rates have risen to some astronomical number will fail to pay off others. Or they will throw up their hands in disgust and punish the issuer who's raised the rate and so has no more leverage to use. Or worse still, they will give up and stop paying any cards. What exactly happens depends on the particular borrower. But the bottom line is not good. It is not surprising that universal default and similar policies have had only a short run: suicide pacts don't tend to last long.
