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European edition, Sunday, September 9, 2007

YOKOSUKA NAVAL BASE, Japan — It’s like an improvised explosive devise hidden in the fine print. It’s called a universal default clause, and credit card companies can trigger its use and make a mess of your finances and credit rating.

Marketwatch.com describes universal default as a common practice used by credit card issuers to increase consumers’ annual percentage rate (APR) when they are late paying bills owed to other creditors.

“The rules and regulations implemented on behalf of the credit card industry aren’t designed to protect the customers,” said financial counselor Collin Schriver, of Yokosuka’s Fleet and Family Service Center. “They are in place to benefit the lenders.”

A 2006 report from the Government Accountability Office confirmed what the lending industry has known for years: Millions of card holders are unaware of or confused by their own credit agreements.

“I know of a sailor and his wife who were late with their mortgage payment when they moved from San Diego to Japan,” Schriver said. “The late payment appeared on their credit report, triggering three of their credit cards to enact the universal default and raise their rates.”

Schriver said as a result of universal default kicking in, an otherwise financially responsible family struggled to make payments on a subprime mortgage that just ended its interest-only period and faced APRs boosted to 29 percent, 26 percent and 19.5 percent, respectively, on their three credit cards.

“The letters announcing the rate increase just recently arrived in the mail,” Schriver said. “The bills haven’t even arrived yet, and this family is scared to death.”

Schriver views the universal default clause as the most nefarious lending policy the credit card industry employs — and he is not alone.

“The thought of it raises the hair on the back of my neck,” wrote Michael Chindamo, managing director and co-founder of Family Financial Advocates and Family Value Creations Inc. “The concept of having a creditor having the license to disclose late payments to other creditors, thus giving them the right to penalize you … should be criminal.”

According to Consumer Action, a San Francisco-based nonprofit that seeks to advance consumer rights, nearly half of credit card companies have a universal default clause that allows them to raise credit cardholders’ interest rates to as high 40 percent.

Some states are working on legislation that would make universal default illegal. In June, New York’s Legislature approved actions to ban companies from enforcing universal default on cardholders in the state. Final approval awaits Gov. Eliot Spitzer’s signature.

Chindamo said passage of such laws will not be easy due to political influence from special interest groups and “large financial dictators.”

“I am very saddened such a scenario exists,” he said.

Meanwhile, experts advise, understanding credit card policies and personal financial management will help consumers protect their finances.

Universal default: How to avoid the trap

When it comes to universal default, a little understanding can go a long way toward protecting your financial well-being.

“The bottom line in protecting yourself is to pay all of your bills on time and, if you can, pay them early,” said Yokosuka Fleet and Family Service Center specialist Michael Spiltener.

Spiltener said the trick is to send out payments early enough so they arrive and have time to be processed before they are due.

“Once a negative report hits your credit report and the universal default is invoked, the damage is done,” Spiltener said. “Unless you have proof that your payments were delivered on time, you will likely find yourself paying higher interest rates and other fees for years.”

Another way to avoid getting trapped by universal default is to avoid credit card companies that use it.

“Read the fine print before you sign,” Spiltener said. “Look for phrases to the effect of, ‘All your APRs may increase if you default under any card agreement,’ and references about failing to make a payment to ‘us or any other creditor.’”

— Chris Fowler

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