The End Of Universal Default: Foreclosure Will Not Raise Credit Card Interest Rates

Added January 18, 2010 by Ilyce R. Glink

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Summary: The End Of Universal Default: Foreclosure Will Not Raise Credit Card Interest Rates In the past, Universal Default could make your credit card interest rates go up. If you went into foreclosure on your mortgage, your credit card company could increase your interest rate because of universal default. Under the new credit card legislation that goes into effect February 2010, universal default will not be allowed, based on foreclosure or anything else not related to your credit card. Take the time after foreclosure to concentrate on paying off your debt and raising your credit score.

Q: I really enjoy your column. If I walk away from a mortgage, how does that affect my other obligations?

In other words, can a lender use my foreclosure on a house to adjust the terms of the credit card I have with them? So if I default on a mortgage, and I have a card with the same lender that gave me the loan, can they increase the interest rate on the credit card? Can a separate company look at my foreclosure and raise my interest rate based on my poor credit score?

Or, and this is what I’m hoping, is a foreclosure handled in and of itself with no ramifications on other existing credit obligations?

The End Of Universal Default: Foreclosure Will Not Raise Credit Card Interest Rates

This is a very stressful moment for my family, including my wife and two young sons. Thank you for your prompt and informative response.

A: Universal default is a nifty little term that means credit card companies can look at one piece of negative information on your credit history, like a foreclosure, and immediately raise the interest rate on a credit card - even if you always paid that card on time.

The new credit card legislation, which goes into effect this year, will eliminate universal default.

At the moment, a creditor could raise the interest rate on a credit card if your home goes into foreclosure, but not after the credit card legislation goes into effect.

I can only imagine how stressful it is for you and your family to be facing this situation. I'm so sorry. The credit card legislation has already been signed into law and most of the protections go into effect on February 22, 2010.

CreditCardReform.org, a website published by the Consumers Union, details the new legislation. According to the website, the new Credit CARD Act restricts all rate increases in the first year; restricts interest rate increases on existing balances; increases the notice the creditor must give the borrower on rate increases for future purchases; preserves the borrower’s ability to pay off debt on the existing terms; limits fees and penalty interest; and, requires fair application of payments as well as other consumer protections.

Although the new Credit CARD Act contains many consumer protections, you should also keep in mind that credit card companies might still cut the credit limit they have with their customers if the customer’s credit score drops or if the lender feels insecure about the customer’s ability to repay his or her debts.

Please click on the “learn more” button to start your search for information on the new Credit CARD Act.

Learn more about the credit card legislation

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