May 4, 2007

Understanding Your Credit Score | Universal Default Provision

A recent encounter with a friend reaffirmed my belief that managing your credit score is a critical and ongoing process. A friend had approached me to find out what she could, and should do to fix her credit score. I was surprised because she had always taken pride in having a good credit score for someone her age. So I asked, "What happened?"

She explained that in the process of moving to a new address, one of her credit card bills did not get forwarded. As a result she missed a payment on one of her six credit cards. Then the evil face of Universal Default popped up. Very simply put, Universal Default is a provision in a credit card agreement that says if you miss a payment with any creditor, that they can consider it a missed payment on their account and can adjust your interest rate. In her case, all six cards raised her rates. She went from having interest rates ranging from 0% to 9.99% to rates ranging from 21% to 25%. Her minimum payments increased dramatically and caused her to miss more payments. And a bad situation became a disaster within three months.

Some warnings to take from her situation:

Have a list of all your bills and their due dates and mark them off each month as you pay them. This way if you never get a bill, or you lose it, you still know it needs to be paid and can get it paid on time.
Don't drop and add credit cards to save a couple of dollars. Her experience was the creditors who were most willing to work with her were the ones that she had a longer history with.
All other things being equal, pick and use the credit cards that do not have the Universal Default provision. The only problem with this is the credit card companies can change these provisions whenever they choose. i.e. they can add the Universal Default provision at any time.

A closing thought: It is your responsibility to pay your bills on time every month, bill or no bill.

Remember, if you’re not working the system, it’s working you.

PapaJoe