Universal Default

UNIVERSAL DEFAULT….Via Roy, the Consumerist has some entertaining liveblogging of Tuesday’s Senate showdown between Carl Levin and the credit card industry:

9:34: And we’re off. Levin has arranged for an interesting hearing. The first consumer we will hear from is Janet Hard. Janet is married to a steamfitter. She has a Discover card that jumped from 18% to 24% because her FICO score dropped. [Note: FICO = credit score. –ed] When Janet complained, the rate dropped to 21%. Discover’s President will testify today.

9:37: Levin is most incensed by the retroactive nature of rate increases. Take a consumer whose debt jumps from 15% to 27%. That new rate applies not to new debts, but to all incurred debts.

….9:41: Bonnie Rushing has two Bank of America cards. One is associated with AAA. Both cards had an 8% rate. BoA bumped the AAA rate from 8% to 23% because Bonnie’s FICO score fell. It didn’t matter that her payment history was perfect. Bonnie isn’t sure why her FICO score dropped, but she thinks it may be because she opened a store-branded card at Macy’s to receive an immediate 10% discount on a purchase, unaware that it would affect her FICO score.

….9:46: Most people don’t realize that their FICO score drops even if they approach — not exceed, approach — their credit limit.

9:47: The Committee asked who determines a FICO score, who determines when a rate jumps because of a FICO score. The answer: computers.

9:47: Issuers don’t know why a FICO score drops. They have four “reason codes,” generic statements like: “balance grew too fast compared to credit limit,” or “balance on bank cards is too low.”

9:48: By law, consumers are entitled to know who supplies credit data. Even with this data, few consumers realize that a rate hike was caused by a lower FICO score.

….10:25: Levin is really pissed that these rate increases are retroactive. More troubling, none of the consumers testifying realized that rate increases applied to past debts.

The general subject here is “universal default.” This means that if, say, you’re late paying your electric bill, Visa can double the interest rate on your credit card even though your late payment had nothing to do with Visa. Anything that lowers your credit score, whether you know about it or not, can potentially change the interest rate on your credit card balance.

But it’s even worse than that! Not only can they double your interest rate if they feel like it, but the new interest rate applies retroactively to your existing balance, not just to any new debt. Your minimum payment of $500 can become a minimum payment of $1,000 overnight and there’s nothing you can do about it.

This is so patently unfair that most people can’t believe it’s legal the first time they hear about it. Even the subprime mortgage leeches never tried anything like this. But not only is it legal, it’s common (read the fine print on your credit card contract someday). In an industry so rotten and corrupt that even Boss Tweed would blush to be part of it, universal default is by far the rottenest and most corrupt practice around.

At least, I think it is. If the credit card industry has something even worse up its sleeve, I’m not even sure I want to hear about it. But feel free to offer up nominations in comments.