Universal default is a practice put in place by banks to correct for the information asymmetry in credit markets.
Parse that one, boys and girls, I dare you.
Universal default is but one of a bunch of piling on techniques developed by the financial “services” industry over the years. It is a term, usually in credit card agreements, that if you’re in default to one creditor, a creditor to whom you are not in default can raise your interest rate, even on any existing balance. Sometimes, even if you’re not in default to anybody, a card issuer may decide to increase your rate:
Is this a great country, or what?
When I, my friends, was called to the bar, I’d an appetite fresh and hearty. And the usury statute in Minnesota provided, as similar statutes did in most states, for three kinds of limits. First, there was a cap on the interest rate that could be charged. Second, no greater interest could be charged after “maturity” than before (in other words, default rates were prohibited). Finally, there was a prohibition on the compounding of interest, or “interest on interest.” The statute was Minn. Stat. sec. 334.01. As Yogi Berra said, “You could look it up.”
Since then, loan sharking has become a respectable business, thanks to federal law. Our “financial services” industry has also grown from about ten percent of the economy to maybe a quarter to a third of it. Default interest rates, large late fees, and the growth of the rent-to-own and payday lending industries are certainly part of that.
Defenders will say that this makes credit available to more people; detractors say it just gives the hyenas a broader range on which to feed. Both are true to some extent, although Spot tends toward the latter camp. That is especially so in cases like the one the woman in the video describes.
The late fees, default rates, and rates applied on “universal default” are entirely out of proportion to any increase in administrative cost or additional credit exposure incurred by the credit card industry for making credit available less creditworthy customers. In fact, although Spot doesn’t have a link at the moment, the credit card industry is not so much an interest-based industry as it is a fee-based industry, making more on fees than it does on interest.
Saying that the hyena effect is the result of “information asymmetry in credit markets” is laughable, or as George Will might say, risible. It’s plunder, plain and simple.
Spot, was that Gilbert and Sullivan you quoted?
Very good, grasshopper.
A thump of the tail to A Tiny Revolution.
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