Purpose

• Credit card companies regularly review their customer's credit reports. Some reasons for doing so are to offer credit line increases or to make decisions on credit line decreases. When a company runs a customer's credit report and notices late payments on unrelated accounts, that customer could represent an increased credit risk. This means that the credit card company views the customer as having a higher risk of defaulting on their credit card. To offset or mitigate the increased credit risk, the credit card company begins charging the customer the higher default interest rate.
  
  

Universal Default Ban

• The passing of the Credit Card Accountability, Responsibility and Disclosure Act prohibits the use of universal default. This means that if a consumer is late paying one creditor, a different creditor cannot automatically raise their interest rates. Credit card companies can now only apply the higher default interest rate if a cardholder is more than 60 days past due on their payments. The credit card company must now give the creditor at least 45 days notice before applying the higher interest rate.
  
  

Automatic Rate Drop

• The CARD Act requires credit card companies to review customer accounts at least every six months. Once a credit card company applies the default interest rate to an account, it must reduce the interest rate once the account-holder makes on-time payments for six consecutive months. The amount of the interest rate decreases depends on the credit agreement signed by the consumer.
  
  

Payment Time Frames

• Prior to the passing of the CARD Act, it was not uncommon for credit card companies to increase a cardholder's interest rate if the credit card company did not receive a payment on the exact due date. The CARD Act states that if cardholder's can provide proof that they made their credit card payment within seven days of the due date, the credit card company cannot count that payment as late and therefore, cannot apply the higher default interest rate to the account.