The Checkout

Faulting Universal Default

For consumers, "universal default" has to be one of the most aggravating policies practiced by credit-card issuers. Now, New York may become the first state in the country to do something about it--at least if Gov. George Pataki signs a bill passed by the state legislature last month.

What is universal default? If you don't know, consider yourself lucky because it probably means you've not been affected. Under universal default, a credit-card company monitors the credit histories of its customers, even those who are current in their monthly payments. If a customer is late paying another creditor (such as another credit card company or utility)-- or has taken on so much debt that his or her credit score drops -- the credit card company automatically raises that customer's interest rate on existing and future balances. Default interest rates can be as high as 35 percent; most are around 30 percent.

Customers have complained that they have little choice once the higher rate is imposed; if they want to continue using the card, they have to accept the higher rate. If they refuse, the account is closed, with the cardholder liable for the existing balance at the old rate.

Credit card issuers say rates need to reflect their risks and the overall creditworthiness of the borrower. But consumer advocates have called the practices unjust and unfair, noting that in some cases the interest rates are double or even triple the rates under which cards were issued.

In June, the New York State legislature completed a measure barring credit card companies from raising interest rates because a consumer missed or made a late payment to another creditor. "This legislation sends a clear message that this type of anti-consumer behavior will not be allowed in our state anymore," said Assemblyman Peter M. Rivera (D-Bronx), chairman of the Assembly Puerto Rican/Hispanic Task Force, and the author of the measure.

Consumer groups have been trying--so far unsuccessfully--to get this same kind of law passed in the U.S. Congress. "I love it," said Linda Sherry of Consumer Action, a nonprofit organization that conducts an annual survey on fees and rates. "Credit card companies are the only industry in the world to re-price something you already paid for," Sherry said. "I just hope New York will be able to impose" the new law (assuming Pataki signs it) on the national banks that aren't chartered in New York, Sherry added, noting concern that the law may be challenged in court or by federal regulators.

Have you been hit by universal default? If so, please tell your tale in the comments.

By  |  July 10, 2006; 9:50 AM ET Consumer News
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Comments

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Not me. I pay 100% of my balance every month. No interest charges either.

Posted by: Steve | July 10, 2006 10:44 AM

I was very interested to read this article, because my credit card, the same one I have had for over 20 years, suddenly demanded interest at incredible rates (almost 30%) after the card issuer was purchased by a large New York bank. I had recently been through a period of underemployment (i.e. employed but low income), during which I maxed out the card, but certainly continued to make the required minimum monthly payments. Just as I had gotten through this difficult financial period, stabilized my income through forced self-employment, and was beginning to reduce the debt that I incurred while underemployed, the credit card issuer was purchased by the big NY bank and the interest rate on my credit card suddenly zoomed. Though I was making no elective purchases (which would put my credit card balance over the credit limit), I still had a couple of creditors that insisted on billing my credit card monthly, rather than allowing me to pay them directly, and those charges did cause the credit card balance to exceed the credit limit a number of times. What an avaricious feast the big NY bank has had! Thankfully, I have another credit card issuer (whose terms are 1-yr interest free on transferred balances) that is paying off the big NY bank, and hopefully this will be my chance to get out of debt! Lesson: Be aware that when your credit card issuer is purchased, things will probably change, perhaps dramatically! and, Avoid letting creditors charge recurring monthly charges (such as for monthly internet service) to your credit card! Oh yeah, don't over extend yourself, either! (To be clear, I am the one who is responsible for the financial jam I found myself in!)

Posted by: Jerry B. | July 10, 2006 10:50 AM

Do all of your business with a Federal Credit Union. Federal Credit Unions are restricted by law to change a maximum of 18% interest on any account. Plus, credit unions are non-profit and provide better service than any other financial institution!

Posted by: Gregg Baird | July 10, 2006 11:16 AM

Linda Sherry is an idiot - "Credit card companies are the only industry in the world to re-price something you already paid for"

Um, future borrowings (i.e. additional purchases) are NOT something already paid for. Actually, until the debt is paid NOTHING is paid for.

The cards raising the rates allow you to close the account and pay off at the old rate. Nothing wrong with that.

Mark my words. If this bill become law, NY banks will start closing accounts of people who are late paying others. If they can't re-price the risk, they remove the risk from the table. Of course, the consumer can open a new credit card at a higher rate if they want.

This isn't a good thing for consumers. Short-sighted politicians.

Posted by: Non debtor | July 10, 2006 11:17 AM

Non debtor - one of the gripes is that credit already extended is being repriced (under some of these finance contracts) and the borrower cannot choose to cease using the credit line and pay off the balance under the previous terms. Of course if they can refinance quickly at a better rate, the effect is small.
I'd like to see meaningful usury laws again. A loan that isn't profitable at 10% over inflation for a 36 month term should not be extended. I know it won't happen.

Posted by: WW | July 10, 2006 12:23 PM

WW, quoting from the original post - "If they refuse, the account is closed, with the cardholder liable for the existing balance at the old rate."

The cardholder is able to stop using the line of credit and pay the balance at the old rate.

Posted by: Non debor | July 10, 2006 12:49 PM

The idea NY banks will close the accounts of people who default on other debts is inane. Even without universal default, credit cards are the most profitable line of business for retail banks. That's why Bank of Ameica paid a huge premium for MBNA. Dumping universal default simply will not change the equation.

Cards do NOT allow you pay off the debt at the old interest rate. Merely by using the card you agree to the new terms--terms which the issuing bank deliberately makes as obtuse as possible. They've admitted this to Congress.

Banks do reprice something you've already paid for. You pay the annual fee on your card, you charge something, you pay your bill on time, and yet you have to pay more because you were late on a totally different debt. Don't say the card holder agreed. As I said above, banks spend a lot of time and money on trying to make sure you do NOT understand the contract.

Making ludicous statements like "you should have read the contract" ignores reality. These contracts are NOT meant to be understood. The law of contracts requires knowing agreement, not contract by deceit.

Banning these practices won't hurt the banking industry. Non debtor would know this if he/she knew anything about the industry. So just ignore his pro-baning rants.

Non debtor can't work in the financial services industry, or he'd know how lame are his arguments. But then again, he could work for a bank, posting here as a troll.

But if do have universal default, let's have the IRS play the game, too. Congress can change the Internal Revenue Code to apply universal default to any taxpayer applying it to others. A bank putting universal default into its credit card agreements will be deemed to be late on paying its federal taxes if the bank is late on any of its other obligations. The IRS will apply penalties and interest as if the bank was late on paying its taxes.

What's good for th goose is good for the gander.

Posted by: Geroge | July 10, 2006 1:32 PM

Hey George, I know more about the financial and banking industry than you think.

Again, Ms. Mayer said above "if they want to continue using the card, they have to accept the higher rate. If they refuse, the account is closed, with the cardholder liable for the existing balance at the old rate." So where do you come off saying you cannot stop using the card and pay off the balance at the old rate???

"Merely by using the card you agree to the new terms" - that is an act of the consumer. Just because the consumer can't (or chooses not to) read the terms, don't be blaming big bad industry.

"These contracts are NOT meant to be understood." Funny, I've been able to read and understand each and every term document received with my cards. They are in English.

If banks cannot reprice the risk (i.e. riskier credit line = higher rate), the banks will NOT keep the line open at the lower rate. Some accounts WILL be closed. Surely not all late payers but some - maybe even many.

And George, Dorothy called. They want the strawman back in Kansas. That stupid analogy about the IRS is vacuous. Even if the IRS did that, as long as the bank was paying its tax bill on time, universal default wouldn't mean a thing.

Credit card companies aren't going to charge interest to people paying the full amount prior to the due date not matter how late they are on other bills.

Posted by: Non debtor | July 10, 2006 2:19 PM

A lot of this is reinforced by the adored-by-banks restructuring of personal bankruptcy last year. Now that it's harder to declare personal bankruptcy to seek debt relief, there's essentially no reason for banks NOT to jack up interest on cardholders who are in marginal positions. Those with OK credit will just get a new card somewhere else with a promo rate somewhere else, transfer the newly-jacked-up card's balance, and move on. This suits the card issuer just fine, since they got paid, and it suits the new card issuer because now they have the account.

The real problem will be for people whose credit won't permit them to move the balance elsewhere, and at a time when they're pressed to pay minimums anyway, due to unemployment or medical bills or whatever, the minimums suddenly go way up, without bankruptcy as a reasonable option.

The overall effect will be to deny effective use of credit to people who may, through no fault of their own, be temporarily in tough times, and to make those times tougher. Shortsighted thinking on the part of banks, really... they'll NEED those customers eventually.

Posted by: Turtle | July 10, 2006 2:30 PM

Non debtor - as you claim to be an expert you might know the answers to the following questions:

1. Does an automatic payment say, my phone bill, mean I am stuck with the new interest rate for everything if I haven't had a chance to get it going to a new place before I close that account? Don't want to close that account before I get the phone bill sorted out - don't want to default on that bill. And depending on timing of the interest rate notification and the scheduled debt date this could be as short as 1 business day.

2. I interperted the credit score comment as say you lose your job so your income goes down, your credit score goes down, you are still meeting all your obligations, but they raise your interest rate? Is this what this means?

Posted by: Anonymous | July 10, 2006 2:31 PM

July 10, 2006 02:31 PM,

In answer to your first question, yes, you are stuck with the new rates if you charge anything to the old card. They don't give you 30 days, they up the rate immediately.

I think we need to bring our usury laws up-to-date. It used to be that anything over 20% was considered usury. Now we are seeing 30%+. Isn't that what loan sharks charge? Or is 50% the cutoff for usury?

Posted by: Robert | July 10, 2006 3:24 PM

I'm on the verge of closing a credit card account I've had since 1978 over this ... I apparently overlooked a medical bill (at a time when dozens were coming in due to a serious illness) and the card company is trying to apply universal default with 29.99 percent interest. They agreed to stay the action for 4 months, but I still haven't been able to figure out who the original bill is from. I've been paying the card company more than the minimum balance and on time for years, despite unemployment, illness, etc.

It'll be a cold day in h*** when I do business with that bank again ...

Posted by: Away Reader | July 10, 2006 3:27 PM

Looks like Robert beat me to the answers.

Yes, automatic payments by credit card (which I do as much as I can) will be a new charge and therefore acceptance of the new terms. I've found that a quick call to the billing company (phone bill, cable, etc.) will turn off/suspend auto payments so you can write the check. For the rare times I change credit cards, I keep a list (simple Word file) of all auto payments and the contact phone number for when I need to change cards on file. Easier than researching every few years.

As for question 2, I believe that is correct. However, as long as you aren't using the credit card as credit (i.e. just charging and paying off), the higher rate won't matter.

I also believe (at this time) that other debt (mortgages, car loans, etc.) comes with pages and pages of documents you signed so those rates either can't go up (fixed-rate loan) or can only go up by pre-set amounts (variable-rate loans).

Posted by: Non debtor | July 10, 2006 3:42 PM

Banks are among the most cowardly thieves in the usury business. But they just do what they can get away with. We do need to rein them in, and good laws are a good start. They won't respond to ethical arguments, don't hold your breath, so let's just get started and show them who's boss around here. An informed, aroused, and activist citizenry is the best defense.

Posted by: Anonymous | July 10, 2006 4:34 PM

Yet another reason NEVER to put current charges on the card you use to pay off a balance. Put purchases on one card (e.g. a miles card) and any balance on another card (preferably with a promotional rate). Then if the card with the promo rate screws you, pay it off with another promo rate - you probably have 10 in your mailbox at any given time.

Posted by: andrew | July 10, 2006 7:00 PM

Dear friend,

First and foremost I am trusting you with this matter in
this mail, with the hope and prayers that you would keep every
information you get from me strictly to yourself no matter what,
whether you are ready to corporate and assist or not. After reading and
reasoning, you can then make your own decision of exactly what you are
going to do.

My name is Tim Doxtin. I live in the Republic of Ireland.
I am a Solicitor and I have a very unusual mutually Beneficial proposal
for you. I have a late client who was an influential wealthy
businessman, he was involved in Real estate and Farming here in Ireland
and he left behind a deposit of Twelve Million, Two Hundred Thousand
United States Dollar in a safe keeping Account with a Finance house
here in Dublin Ireland. After the death of my client his bankers
contacted me as his Attorney to provide his n ext o f kin who should
inherit his fortune. The board of directors of his Finance house
adopted a resolution and I was mandated to provide his next of kin for
the payment of this money within 28 working days or forfeit the money
to the Finance house as an unclaimed fund and used to serve their
personal interests. The bankers had planned to invoke the abandoned
property decree of 1996 to confiscate the funds after t he expiration
of
the period given to me.
I came about your email in an unusual circumstances. After
searching through various means for any relation of my client
I had to go to your countries Embassy to find a solution.

But still they were not able to assist me. It was an officer from the
embassy who later gave me a genealogical search formula that I can use
to locate any relative of my client with his correct information.
Convinced that you may be linked with my late client or that you might
provide clue t o my search, I th erefore, decided to contact you with
these facts before me because of the situation now .By virtue of my
closeness to the deceased and his immediate family, I am very much
aware of my client financial standing and the bank account he
operates.
I have reasoned very professionally and I feel it will be
legally proper to present you as the next of kin of my deceased client,
so that you can be paid the funds left in his bank account, hence I
contacted you. I seek your consent to present you as the Next of Kin to
the Deceased since you are at an advantage as nationals from the same
country, so that the proceeds of this Bank Account valued at Twelve
Million, Two Hundred Thousand United States Dollar can be paid to you.
I shall assemble all the necessary Legal Documents that will be used to
back up our claim. I have assessed what it is going to cost to gather
together the required legal documentation and hav e no ted that it will
take Twenty two thousand dollars. This is more than I have, but I am
willing to do this over here. All I require is your honest co-operation
to enable us see this deal through and for you to also invest one
thousand seven hundred and fifty euros which is the mandatory handling
charges required by the Finance house.

I guarantee that this will be executed under a legitimate arrangement
that will protect you from any breach of law. Please get back to me.
Contact E-Mail: tim_doxtin06@yahoo.co.uk
Yours truly

Tim Doxtin


Posted by: solicitor tim doxtim | July 10, 2006 8:30 PM

I OFFER LOAN TO ANY INTERESTED PERSON WHO WANTS TO GET IT IF YOU ARE INTERESTED IN GETTING THE LOAN WITH MY TERMS AND CONDITIONS CONTACT ME VIA EMAL AT STEWART_COLE@YAHOO.CO.UK

Posted by: LOAN OFFER GUARANTEED | July 10, 2006 11:01 PM

I OFFER LOAN TO ANY INTERESTED PERSON WHO WANTS TO GET IT IF YOU ARE INTERESTED IN GETTING THE LOAN WITH MY TERMS AND CONDITIONS CONTACT ME VIA EMAL AT STEWART_COLE@YAHOO.CO.UK

Posted by: LOAN OFFER GUARANTEED | July 10, 2006 11:01 PM

Away Reader,

You may not want to cancel that card you've had since 1978. It could harm your credit score. The age of your credit accounts is a significant factor in determining your credit score. I recommend you try to work things out this credit card company. I know this isn't fair and you deserve better. I just don't want to see you get dinged even worse.

Tom Fragala
Truston
Blog: http://blog.trustoncorp.com

Posted by: Tom Fragala | July 11, 2006 1:48 AM

Oh no, it's "unfair" [sic]. The following statement that "Credit card companies are the only industry in the world to re-price something you already paid for," is not true, given that the retailer actually pays the transaction costs if the balances are paid on time; and if you have an outstanding balance, then that is when you are paying for the service (i.e., after the fact). If I were a credit card company, I'd do the same thing, given the increased credit riskiness of the customer who is not covering their other debts. Moreover, the card holders with good credit pay for defaulted balances, so it's just another wealth transfer from the irresponsible to the responsible card holders. Now that's "unfair."

Posted by: Philip Budzik | July 11, 2006 8:08 AM

No credit cards for me. I don't trust these companies!
I can mange just fine with cash! :)

Posted by: NoCC | July 11, 2006 8:10 AM

How do you buy a car with no credit? Maybe you can afford to pay with cash.

How do you buy a house with no credit?

Posted by: NoCC | July 11, 2006 10:25 AM

the last comment was directed to NoCC, and should was mistakenly authored as NoCC; pardon the confusion, please.

Posted by: oops | July 11, 2006 10:26 AM

NoCC said he/she didn't use credit cards. He/she didn't say anything about not using other types of credit.

I would hope people wouldn't buy a car with a credit card. :)

Posted by: Non debtor | July 11, 2006 11:10 AM

I would not buy a car with a credit card, either, but how do you establish credit if you don't have a credit card?

Posted by: oops | July 11, 2006 11:11 AM

Great article as usual Caroline! Let's hope that the Govenor signs the bill. My hats off to Consumer Action as well.

By the way, we have a great article on our site which discusses some more of the nuances of universal default:

http://www.cardratings.com/howtoavoidcreditcardinterestratehikes.html

Best Regards,
Curtis Arnold
Founder
U.S. Citizens for Fair Credit Card Terms, Inc.
http://www.cardratings.com
Phone: (501) 663-0314 x3


Posted by: Curtis Arnold | July 11, 2006 11:53 AM

Hasn't happened to me yet...

Oops - "... how do you establish credit if you don't have a credit card?"

It can be done, but perhaps not easily. One way is to get a "secured" credit card - which is actually a debit card, but is reported as a credit card - and "charge" maybe $10 per month then pay perhaps $11/month. After about three years (LOL) you will have a good track record, or rating, and leverage that into loans, mortgages, actual credit cards, etc.

This used to be possible with Sears because they would issue $400 credit to just about anyone who was breathing, but now that they are Discover Card I am not sure.

Posted by: John Anderson | July 12, 2006 2:03 AM

My dollars are pretty small, so while I try to vite with the mthe best that I can, the CC co's buy lobbyists and congress.

I would like to get a settlement on the CC debt, but now with the laws changed, I wonder if I can get one.

The rates being that high are horrid for paying anything off. It makes me wonder how many people might get in but never get out, at least in part due t ono bankruptcy.

And please don't blame people with bad credit for fees and increased rates for people with good credit.
That's not true.

The CC companies' profits have gone up each and every year for as long as I can remember. They more than make their money bank, and they always want more, more more.

Posted by: Deanna | July 12, 2006 3:01 AM

Did de big bad cwedit card company charge you a higher rate of interest? Poor widdle deadbeat babies. And just because they concluded that your default to another creditor raised the risk that you'll default on other obligations, including those the credit card company holds. Here's a novel approach don't buy if you can't afford to pay for it, and completely depleting your savings and living on debt counts as "can't afford it."

Credit cards are credit lines that are re-extended on a monthly basis if you don't pay off the balance. It's not repricing what has already been sold -- no one is entitled to a perpetual credit line, and when you default on payments, expect credit to get more expensive. Governments and businesses, both large and small, live by those rules, and if creditors can't use payment defaults to distinguish between good and bad credit risks, the good ones subsidize the bad ones. I don't want to pay more so you deadbeats can pay less. Let the credit card companies charge what they want and let the market sort things out. Regulation isn't the answer, personal fiscal responsibility is.

Posted by: RC | July 12, 2006 10:53 AM

Youch, such heartlessness - is Ann Coulter trolling on here?

I see repeated references to being able to "just" close the account and pay off the old balance under the old terms, but is that the whole story? If you close the account, I believe you become liable for the full balance immediately. And if you had that kind of money, you probably wouldn't be worried about universal default.

Universal default should be outlawed, pure and simple.

Posted by: KJS | July 12, 2006 11:46 AM

Banks will do what they can get away with. The same applies to almost every industry. They are just trying to make money. In this case, they are quite successful. Consumers need to be educated or laws need to be put in place.

If people want low interest rates then people are going to have to accept banks changing interest rates. The problem is that banks abuse this fact when hiking rates up to 30%+. A consumer might prove they do not deserve 9.9% by missing payments on several accounts. But instead of charging the 14.9% they do truely deserve, the bank sends it up to 29.9%. Why? Because its more profitable. Because enough people actually pay that interest rate instead of changing accounts.

So please everyone transfer balances as soon as your rates go up. And for those that can't, we need some effective legislation. Say a simple limit on the magnitude interest rates can increase each year, like with mortgage ARMs.

Posted by: GB | July 12, 2006 1:46 PM

I hope someone removes the "Nigerian Scammer" posts. "one thousand seven hundred and fifty euros which is the mandatory handling charges required by the Finance house" indeed.

Posted by: Casual Observer | July 12, 2006 4:44 PM

Yeah, I reported those scam posts and asked to have them removed yesterday. so much for people actually manning the helm at WaPO.com. Now just sit back and see how many undereducated folks actually respond to the posts and send their info. Sighs...

I wish banks would not be allowed to charge more interest than what the Fed charges banks for their funds. Fair is fair. Why can't the Fed charge the banks usurious interest rates pf 29.99%? Bet that would get a message across.

Posted by: CyanSquirrel | July 12, 2006 5:55 PM

We see trolls like non-debtor all the time. Trolls say people shouldn't complain about their PCs getting worms and trojans; they should be smart like him. Non-debtor obviously is one canny consumer who never makes a mistake and always makes the right choice. He never whines or complains but takes it on the chin.

You use the card. THEN you get a notice in the mail, effective before you receive the notice, informing you of universal default. Credit card agreements sometimes state notices are effective on the date of the notice, not the date received. Or you're out of town and you use the card after the effective date of the notice, and you get hit with universal default. Or you're working 60+ hours a week and don't have time to immediately read 8-point notices drafted by lawyers paid handsomely to confuse you. Or you have screaming kids taking up all your time. Ooops, just don't have kids! Then you be like non debtor!

Wait a minute, non debtor isn't caught. He reads all this stuff immediately. He understands everything. He understands contracts more complex than the Internal Revenue Code (btw, it's in English too--how much of it do you understand? Go read section 1092 and tell us all about straddles). He's perfect. He's never fooled. So everyone must be measured by him.

Sorry, non debtor, but the law is not made for perfect beings such as yourself. It's made for the average consumer. The ones the credit card industry deliberately targets with delibeately misleading fine print.

non debtor's reasoning would gut anti-fraud laws. He says using the card is an act of th consumer. But all victims of fraud act in some way. Excusing the perpretrator just because the victim performed some act would excuse all fraud.

As for repricing risk, you assume the risk increases just because of other defaults. Got any proof? Any evidence from the markets showing this is the case? Or is universal default simply an excuse to raise fees and penalties? The banks have given no real evidence the risk has increased. Show me default data from credit card ABS deals. If the risk increased, the default rate on the debts in the ABS pool would increase. I haven't noticed this (and yes, I do follow this kind of stuff), and neither have those working in the business. If the default rates don't increase, there's no reason to reprice the risk.

The banks will NOT close accounts. They didn't in the past, and they won't now. This is a scare tactic, which non debtor has swallowed, hook, line and sinker. Assuming he actually believes it in the first place.

As for not charging interest to people who pay on time, they drop these people. Banks call them convenience users, and have dropped them because they don't pay late fees or penalties. Banks will NOT drop users who incur fees. On the contrary, banks love them. That's why they market to them, and not convenience users. That's the point of teaser rates. Banks hope you'll be late on just one little payment so they can sock you with fees and penalties. That's why some large issuers of credit cards don't give a break to convenience users. Their call centers show green, yellow or red lights when they call up customer records. The more late fees and penalties you pay, the more breaks they'll give you. But convenience users get a red light--no breaks, hit 'em with all the penalties you can. The story in the press was quite interesting. Especially the statement by the bank exec saying this is all about maximizing fees and penalties. And not wanting convenience users.

As for the IRS argument, you're contradicting yourself. You say as long as the bank pays its tax bill on time, universal default wouldn't mean a thing. But you say that individuals who pay their credit card bills on time should pay fees on their cards if they're late on other bills because default on one debt increases default risk on other debts. Please give us your sarcastic wisdom and explain why this economic rule doesn't apply to banks, why default on one debt of a bank doesn't increase default risk of other debts of the bank, including taxes. Or do you think banks are so special that they should be exempt from what you say is a economic fact of life. Either risk changes and has to be repriced, or i doesn't change and doesn't have to be repriced, regardless of whether the debtor is card holder or a bank, or the debt is credit card bill or the amount due on Form 1120. If the banks and their trolling non debtor are right, they can't complain about putting universal default in Title 26, United States Code. We can put in banking provisions, say, right next to section 582 and its discussion of bad debts.

And non debtor, Dorothy called, and wants to know if you will join the Scarecrow in finding a brain. Or maybe join Tin Man looking for a heart.

Posted by: George | July 12, 2006 6:32 PM

Article from ConsumerAffairs.com:

By Martin H. Bosworth

May 24, 2005
Financial giant MBNA may have to take off its rose-colored glasses. During the most recent quarter, MBNA's actual earnings fell to $31.7 million, or 2 cents a share, far short of its projection of $519.7 million, or 4 cents a share.

More and more consumers -- perhaps stung by exorbitant increases in their interest rates -- are paying off their MBNA credit card debts faster than expected.

This development came on the heels of MBNA employees cashing out their early retirement plans in record numbers. The retirement payouts, coupled with the loss of profit from paid-off and closed cards, led MBNA's first-quarter profits to drop by a staggering 94%, down to $31.7 million from their initial projection of $519 million.

The profit projections crashed faster than MBNA executives' helicopter did when it plunged into the East River in New York last month.

The financial services company was once lauded as a pioneer in the credit card industry, for its "affinity" cards for universities, businesses, and organizations and, later, for its tactic of "universal default" (Increasing credit card fees if the owner is late on any kind of bill payment).

Posted by: CowboyJohn | July 12, 2006 7:50 PM

A brief history of myself.

I'm a terrible credit risk. Or at least that's the case if you check my credit history.

However, I've learned a very valuable lesson. Credit cards are advantageous to one side, the issuer. Why do I say this? Well, I was not underemployed, at first, I decided to take my affinity for teaching people about money and try to help others with their financial lives by being an investment advisor. Problem is investment advisors are not for those with credit cards carrying a balance.

We've all heard the old adage, "There are those who understand interest, and those who pay it." Well I have found that's VERY true.

In 1998 I was within three months of being completely out of debt, okay, maybe still a couple years of student loan payments, but no credit cards, no car loans. I was renting and decided to try financial services. Let me share three stories with you. All three not good, but the third turned out okay.

Couple A were both working, bringing in a combined income of around $45,000 a year (this is in a state with a much lower cost of living) they were living in a trailer that was paid for (I know it could be Virginia) and the husband wanted to live in the moment. He had convinced his wife they needed the latest and greatest SUVs they could afford. So they had a $22,000 loan on an SUV at 19%, and another for $19,000 at 24.99% on the second SUV. I know that sounds crazy but they had poor credit with a desire for middle income vehicles. Long story short they were unwilling to sell their vehicles and get something more modest, I can't even remember their CC situation but obviously it wasn't good.

Second story, a man making $60,000 who had just gotten married to a lady who also worked part-time. This guy had taken out a loan from his 401K for some emergency, I can't even remember how legit it was, and he was paying that back. Part of my service was to help people find $$$$. So after reviewing his finances I recommended he downgrade his lifestyle. I told him Digital Cable, two AOL accounts (one was his wife's) and DSL were too much. Revert to basic cable for a few months, get rid of the two AOL accounts and he'd have roughly $70 dollars a month to invest or pay off his 401K loan. Long story short, he couldn't give up these perks and we never did business.

Aside story
A co-worker of mine knew of a family that was supporting their parents in retirement in a $500,000 house (about 3500 square feet, and in a nice neighborhood, again another state) that they couldn't afford post retirement. But they were ashamed to admit they were living above their means and asked their children to help them out.

Okay last story, there was a nice guy who wanted to help people financially and exhausted his savings, took out some consumer debt and tried to be a financial advisor working strictly on commission. Well he met too many people like these first two stories and one month had a chargeback on his commissions of $1200. Since he was struggling to make $1500-$2000 a month to support himself he went into the hole with his company. He didn't receive a paycheck for another month. He didn't recover and left financial services to pay the bills working in a grocery store in the produce department living below poverty until a good job came along.

Long story short, his credit was ruined. He had to fall back on his military training and it took two years to dig out of the financial troubles all while looking for a better job. He paid off all his consumer debt including a judgement in 2003. He did this through a consumer credit counseling service. In the fall of 2003 with a horrible credit rating he obtained a loan for a house since he was now making $60,000 plus and established credit by showing his utility statements and student loan statements along with a letter from his landlord. He had no CC accounts they were all closed, turned over to collections and now paid off.

Long story short "I" still don't have a credit card but have bought a house, obtained a second mortgage (for home improvements NOT to pay off debt or a vacation), and two car loans all without a recent CC history.

Moral of the story, if you have to put it on a credit card and carry a balance you can't afford it. Oh, yeah he also bought a piece of junk car he used to commute with cash.

Now his credit score is still low due to a lack of recent CC history, but who cares, all he'll ever buy on credit again are items secured by the loan.

That's right cash for vacations, nights out with the wife, babysitting, Christmas, Birthdays. If he had to buy it on credit, he knows he can't afford it.

And low and behold he's pretty happy and has even increased payments to charities. I'd rather an extra $50-100 a month go to a charity than some #$!@$#!@ Credit card company.

Any questions?

Posted by: Been there paid that. | July 14, 2006 11:56 AM

Is this why credit card companies run credit reports and scores every month on you? I recently ran my annual report and score and noticed that almost every month my credit card companies (including my Penfed one) run a report/score. Thank god it doesn't count as an official "request", because that brings your credit score down.

I also noticed that Citibank still runs a report. Citibank cancelled my card two years ago... which was approximately one year after I had paid my balance in full. I didn't use it for a year, and they cancelled it. I could get it reinstated, but I just don't think it's worth it. But yet they still run reports on me. That seems wrong to me?

I am guessing, based upon what I learned here, that CC companies run these credit reports to see if you are 30-days late on another debt or your score went down so they can put you into universal default if you have a balance with them?

I am thankful for this Checkout blog specifically when I learn about things like Universal Default. I have never even heard of it, yet it infruriates me.

Posted by: Arlington | July 20, 2006 12:39 PM

The credit card industry changes the terms of contract at will. How many industries are allowed to do this? If mortgage companies were allowed to raise interest rates at will, how many would own homes?

The credit card companies hire lobbyists to pass laws that allow abuse of the consumers because the consumers cannot afford a lobbyist to represent them. They spent 2 Billion $$'s to change the bankruptcy laws.
Research shows that over 75% of all bankruptcies are due to medical bills.

The only answer is to become educated, active and start holding Congress responsible for listening to high paid lobbyist instead of citizens.

Posted by: Robert | July 24, 2006 5:34 PM

I can attest that some credit card companies DO NOT give the debtor the option of closing the account and paying the existing balance at the old rate. This happened to me... I asked to close the account with every intention of paying it off. The company responded that they had already closed my account, and the 29.99% interest rate (up from 8%) applied no matter what. I asked them when my account had been closed as I'd never received notice of this. I was told they didn't need to inform me, and they could legally close any account without so much as a letter. It's rather frightening.

Posted by: Been there | July 25, 2006 10:18 PM

the "Consumer Credit Card Protection Act of 2005" introduced by Reps. Barney Frank and Bernie Sanders a full year ago would prevent- among other egregious credit card practices- the "bait and switch" universal default policies:
http://www.house.gov/banking_democrats/pr0727B2005.html

unfortunately republican leadership that currently controls the agenda hasn't let any real debate on the issue occur

Posted by: loganer | July 31, 2006 4:22 PM

The New York Law banning Universal Default WOULD be a good thing for consumers. It's obvious many comments in this blog have been written by those who benefit from Universal Default but this is a fundamentally flawed loophole, Case in point:

I had a CC from a well known junk card company with practices of moving due dates and delaying payment receipt intentionally, twice they found me late even though I made automatic payments well over the minimum required on the dates THEY specifically told me to use to avoid this issue, this was a low limit card from years ago when I first began building my credit. My high balance never exceeded $277.00 In both cases they reversed the charges and found themselves at fault but they refused to remove the late payments from my credit report! It became apparent to me that they do this in order to jack up your interest rates to the default via the Universal Default rule.

I hold 3 cards from 3 distinct issuers not related to the scam issuer mentioned above, all have been held in good standing for over 80 months each, all were sub 9% cards and ALL were recently adjusted upwards because of the junk card scam mentioned above, those 9% cards went up to a range of 24.9% to 29.9% even though EVERY other item on my report is stellar. My score went from 800+ to 691 because of this one SCAM practice. As well I had to change "Programs" at each issuer to get the rate lowered, again effecting my credit rating.

I have NOT been late on a payment in over 10 years, I always pay more than the min's and I never exceed 50% of my limit for any extended period of time.

So tell me again how Universal Default is good for me? It is only good for those who stand to gain from it, it is devastating to the consumer. Honestly, I could not sleep at night if it were I ripping people off in this manner, they should be very ashamed.

One last point, Having owned several businesses myself and having a very good grasp of risk and reward I'd like to say that credit is a business just like any other business. When you lend money at a certain rate for a certain purpose you as the creditor are taking a risk. The consumer has a reasonable right to believe that he/she has borrowed x dollars at y rate, the consumer has agreed to pay back at this known rate thus entering into a contractual obligation. By changing this rate at a later date you have effectively changed the terms of a contract that the consumer has budgeted and balanced his books for. A variable APR is a fine thing if the consumer clearly understand the Terms and Conditions, I am certain that the vast majority of consumers had no knowledge of the terms of Universal Default until it had already bit them squarely in the rear. Unfortunately many consumers do not have the wherewithal to fight this practice in court, I am certain that any consumer with adequate financial backing could fight and beat this high questionable practice, and I predict that within the next 5 years Universal Default will disappear. What comes around goes around, so scum skimmers beware!

Thank God I just relocated to NY

Posted by: GH | August 2, 2006 10:58 AM

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