New York State Moves to Outlaw Credit Card Universal Default Clauses
According to various news reports from New York, the state’s legislature has sent a bill to Governor George Pataki that would make it illegal for credit card companies to raise cardholder interest rates under “universal default” clauses in credit card contracts.
Universal default clauses written into some credit card issuers’ terms and conditions allow the issuer to raise the cardholder’s interest rate if the cardholder is late on any bill, including being late on bills entirely unrelated to the payment of the credit card itself. While credit card companies who use the clause say universal default–which can cause rates to jump from the teens all the way past 30%–are protection against customers with a track record of not paying their bills, consumer groups argue that they are simply a way to make money from unsuspecting customers.
After the initial uproar over universal default clauses, several issuers removed them from credit card contracts. Estimates vary on how many still use the clauses, but it is generally agreed that it is less than half.
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