Citigroup May Reinstate Universal Default

Last year Citigroup pledged to abandon the customer-screwing policy of universal default, where an unrelated late payment or credit score change can trigger an interest rate increase on your Citibank card. They even used a marketing phrase to promote their promise: “a deal is a deal.” According to the New York Times, Citigroup is “quietly reconsidering its pledge” and may decide to reinstate universal default as early as this week.

As the New York Times puts it, “Citigroup’s deal is only a deal until it isn’t.”

Citigroup continues to suffer mortgage industry-related losses—$40 billion in write-offs over the last year—but there are two other reasons they’re considering reinstating universal default. First, the government has proposed new rules that would limit how Citigroup can raise rates for its risker customers, which may drive the bank to try to increase rates before they’re restricted any further:

The proposed rules would limit rate increases to customers late by 30 or more days, and the new rates would apply prospectively to newly accumulated debts.

The second reason is the “deal is a deal” didn’t work from a marketing perspective:

In any case, the “Deal Is a Deal” policy did not give Citigroup the edge it hoped for. Most customers did not recognize the benefit, in part because of the difficulty deciphering the fine print among offers from different banks.

“We hoped and expected that these two points of differentiation would lead customers to vote with their feet,” John P. Carey, the chief administrative officer for Citigroup’s credit card unit, told a Congressional panel in April. “We have been disappointed with the results we have seen so far.”

Considering one of your own marketing people told our editor that promoting the end of universal default is like “telling people you stopped beating your wife,” we wonder if the bank really promoted their “deal is a deal” pledge aggressively enough. Maybe they just knew all along that it was a temporary promise that would go away after last year’s Senate hearings on abusive credit card practices.

“Citigroup Considers Repealing a Pledge, and the Slogan With It” [New York Times]
(Photo: Getty)

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  1. speedwell (propagandist and secular snarkist) says:

    Yeah, yeah, credit cards are so great and necessary and safe and all that jazz you credit-card proponents spout. Yeah, sure, whatever.

    So tell me again why you:

    - Make a habit of paying a hefty upcharge to spend your own money before you’re even sure you’re going to get it
    - Allow yourself to be a party to a contract that says the other party can unilaterally change the contract terms in its own favor with minimal notice to you, where your only recourse is to pay the balance and leave (provided they haven’t changed that too)?

  2. beavis88 says:

    I don’t know why companies like Citi don’t just start suing their customers to earn a living (see: RIAA) – it would certainly be more straightforward, and they wouldn’t even have to pretend not to be a bunch of shitbags.

  3. blackmage439 says:

    @speedwell:

    Sorry, I had to comment on this.

    Necessary: CC’s are not necessary. No one has said that.

    Safe: Yes and no. If your wallet is stolen, the cash that is in there is gone. If your credit card is stolen, you have recourse to no pay a dime over $50 by law. Hell, if the thief is stupid enough to not use your card within hours, you can easily cancel it before he has a chance to swipe it.

    In other news, this sounds like SOP for Citi. After reading this site’s stories on this corporation, I don’t think I’ll ever do business with them.

  4. @speedwell: So tell me again why you:

    - Make a habit of paying a hefty upcharge to spend your own money before you’re even sure you’re going to get it
    Do you live in a house for which there is a mortgage? Same thing.

  5. Mr_D says:

    @speedwell: Leverage.

  6. mike says:

    As much as I hate to see it, I’d appreciate a credit card company that is honest with its customers:

    We give people with bad credit a credit card because that’s where we make our money. Those of you that pay your balance every month and don’t do cash withdraws can go to another bank. We don’t need your business.

    But if you’re subprime, man, have we got a deal for you!

  7. MeOhMy says:

    @heavylee-again: That…and the “hefty upcharge” is completely optional – just don’t spend money you don’t have and don’t carry a balance.

    Sure, a deal is a deal. And making a deal with a credit card lender is like making a deal with the mafia. “An offer you can’t refuse.” But hey at least they don’t whack you or bust your knees if you cancel your account.

  8. patodonnell39 says:

    The reason “deal is a deal” didn’t work is because that slogan sucks hard. It’s vague and doesn’t make any sense. Obviously, a deal isn’t a deal because they’ve already back out of it at the first signs of it not being effective.

  9. anthonyhasp says:

    @Troy F.: This is why I like my AmEx card. It is a requirement of the card that I pay off the balance every month. I pay a small fee every year for the convenience of using the card and to get rewards points. No BS, no trickery, just an honest exchange.

  10. ffmariners says:

    @speedwell: Most people here are proponents of the whole don’t-carry-a-balance methodology…

  11. speedwell (propagandist and secular snarkist) says:

    @heavylee-again: No, I would never live in a house with a mortgage. I have a building fund that I add to regularly. If I used all of the frugal building strategies I’ve studied and/or worked with a modular building designer I know, and put that together with a piece of country land I purchased on EBay (I visited it, and it’s a pretty fair property), I could build a modest cottage right now out of my own pocket. It’s something I’ve always wanted to do at some point. But I’m comfortable in my apartment and in my current job and I’m not ready to live out in the boonies just yet.

    @Mr_D: OK, Leverage. I partly understand the concept, but I don’t understand how to use it without incurring risk that I don’t know how to manage. Willing to learn, though.

    @Troy F.: Lots of card companies think you stink if you don’t make them money in the form of fees and charges. The finance charges, I agree, are optional (if you can manage to avoid getting your card yanked for being “unprofitable”). The fees, well, those can’t be avoided, especially these days when the credit card companies seem to be looking at the airlines for a model.

  12. barty says:

    Well, if your credit score decreases due to late payments, you’ve become a greater risk. Since few, if any, cards give you a truly guaranteed rate, I can see from a business perspective why these policies got implemented to begin with.

    There’s a simple solution though, don’t use a credit card and if you do, don’t carry a balance. It’s really that simple. Carrying a balance makes you subject to whatever whims the bank wants to impose.

    If more people would forgo some instant gratification and actually SAVE money for purchases, think of what our current economic landscape would look like? You’d pay less for purchases in terms of interest and merchant fees saved and you’d actually make a little on the side should you have half a brain and do something with the money aside from leaving it in a checking account.

    Trying to using low/zero interest cards as a way of “leveraging” your money is dumb for about 95% of the population because most folks just don’t have the discipline or income to do it. ~80% of people who make purchases on incentive deals end up carrying a balance past the incentive period and if they’re lucky they won’t incur retroactive interest at 20 something percent. Even if they don’t, the small amount of interest they made in their money market account or CD pales in comparison to the interest they’re assessed in one month.

  13. cooldarkplace says:

    “In any case, the “Deal Is a Deal” policy did not give Citigroup the edge it hoped for. Most customers did not recognize the benefit, in part because of the difficulty deciphering the fine print among offers from different banks.”

    One could argue that another reason people didn’t see the benefit is that the same people who pay enough attention to credit card/lending terms to switch cards over an issue like this are the same people who, true or not, don’t expect this issue to apply to them because they tend to pay their bills on time.

  14. lockers says:

    @heavylee-again: A mortgage is nothing like a credit card. The may both be debt, but your mortgage is backed by something of actual value. Your CC is backed by nothing. You can sell your house and pay back your mortgage. Your lattes and vacations are not resellable.

  15. Stickarm says:

    When did we all simply accept this idea that banks and credit card companies only like customers who pay fees? What about the thing where they have control over vast amounts of money during the course of all the transactions for which their services are used?

    1) Customer uses credit card to pay Merchant
    2) Customer sends money to Credit Card Company
    3) Credit Card Company sends money to Merchant

    Quite a bit of time can elapse between these steps, including between steps two and three. Between those two steps, the Credit Card Company is infused with money. This happens all the time, continuously, forever.

    So if the Credit Card Company gets control over a continuous stream of capital, why do we accept the idea that the only customers they want are ones who pay additional fees? Wouldn’t they also be thrilled to have a significant number of customers who simply keep this continuous stream of cash flowing? In fact, don’t the absolutely require such customers?

  16. johnva says:

    @speedwell: Well, just keep in mind that there are good reasons why people have mortgages beyond just not having the money to buy a house up front. Leverage is the biggest one, but there are others, such as investment opportunity cost and liquidity. The basic deal with leverage is this: say you have 20% equity in your house. If the price of the house rises or falls by 5%, you’ve just made or lost a 25% profit/loss on your investment in the house. So if real estate prices go up, having a mortgage magnifies your profits if you sell. If prices go down, it magnifies your loss. Of course, both of these things only matter if you actually sell the house and cash in your investment. The way to manage risk here is simple: have enough equity in the house that you can absorb most any downturn in the real estate market, and don’t invest money you can’t afford to lose in a leveraged investment like that. A lot of people made both these mistakes recently, but that doesn’t mean that mortgages are inherently bad or risky. They are perfectly fine, especially if they are fixed rate, you have a decent down payment, and you don’t intend to sell for a long time. Fixed-rate mortgages get cheaper and cheaper over time because the dollars you are paying them back with are worth less than the dollars you borrowed.

    As for credit cards, I’ve never had a credit card company drop me for being unprofitable, despite the fact that I never carry a balance. And I’ve never paid a fee to any of them either, because I have good credit and get only cards that don’t charge any fees.

    @barty: Credit cards aren’t just about buying things you can’t afford. In fact, you shouldn’t use one unless you can afford to pay for something outright.

    I also don’t think “incentive deals” offered through stores are the same as 0% offers on credit cards. I’ve made significant amounts of money via the 0% offers, mainly by delaying payment for expensive purchases. When I bought an engagement ring, I had the money in my savings account to pay for it outright. But I put it on a 0% for 12 months credit card and just delayed paying for it until that was about to come due. As a result, I made a good bit of money in interest. I wouldn’t have done this unless I had that money ready to pay it off at any time, but because I did, it made me money to go and apply for a new 0% card. So I guess I’m in your 5% of the population. But hey. I almost hope people keep being suckers, so that the credit card companies will keep giving me free money.

  17. MeOhMy says:

    @speedwell:

    Lots of card companies think you stink if you don’t make them money in the form of fees and charges. The finance charges, I agree, are optional (if you can manage to avoid getting your card yanked for being “unprofitable”).

    Does anyone care if their credit card lender thinks they stink or are a deadbeat? I’ve never had a card cancelled for being unprofitable…and if it ever happened it’s certainly easy enough to get another one!

  18. Mr_D says:

    The kind of leverage I’m talking about isn’t as extreme as gaming the 0% cards and bouncing the debt around like some people do, it’s much more tame: If I buy something with a credit card, I don’t have to pay for 20 days or so. For that 20 days, my money is free to do whatever it wants, like earn interest. It’s certainly not on the scale that hedge funds, etc use it, but it’s still leverage.

  19. kepler11 says:

    the thing I have never seen addressed by anyone who writes articles critical of the banks for doing this –

    if you accept that the credit card is an agreement between you and the bank to pay a balance you charged to the card, at a certain rate, then when the bank changes the rate on you unilaterally (sending you a notice that the terms have changed, due to universal default or whatever), you have the right to close that account and pay off the balance at your originally agreed rate.

    People seem to believe that all you can do is accept the new rate and keep on using the card. But this is equivalent to agreeing to a new contract to pay your balance at the new rate.

    If you’re unhappy with the rate hike, cancel the card and pay off the balance at your old rate. Yes, you will no longer have use of the card, but you won’t be paying extraordinary amounts of interest then.

    Of course, the bank has most of the advantage in such situations. But I just have never heard of people being told that you have this right — to end the account and pay off the balance at the old rate, if they decide to change the terms on you.

  20. johnva says:

    @Troy F.: Exactly. The one thing that’s consistent about the credit card companies is their greed. They always will be eager to get and keep new customers, because they know that statistically enough of them will screw up for them to make a big profit. This is why they offer rewards programs too – it’s just a way to get new customers and keep them using their cards. The smart consumer just uses their greed against them by being self-disciplined, instead of running away in fear.

    @Mr_D: Yep, you’re instantly getting free float whenever you use a credit card that has an active grace period. The more you spend on them monthly, the more it’s to your advantage to use that. Basically, I always want to optimize my finances by not paying for things until it would cost me money to delay any further. That’s what I do with credit cards, including 0% cards in some cases.

  21. johnva says:

    Oh, and more on-topic: I do think universal default is kind of unfair to consumers (though I understand why, in the current credit environment, the credit card companies are wanting to take steps like this to manage their risk). My biggest problem with it is actually the fact that it can multiply the damage caused by things like fraud and identity theft. If your credit score takes a nosedive because someone steals your identity and applies for a bunch of new credit accounts in a short time period, then universal default can cause this to have ripple effects on your legitimate accounts before you can do anything about the identity theft. That could cause long-term problems with restoring your credit score to where it was before the identity theft took place, and complicate the process of sorting things out. At the very least, if universal default is going to be allowed, I think there should be regulations in place to completely and automatically “undo” any effects on people’s credit scores caused by identity theft, including account closures, credit line cuts, etc that were triggered by the identity theft.

  22. @lockers: A mortgage is nothing like a credit card. The may both be debt, but your mortgage is backed by something of actual value. Your CC is backed by nothing. You can sell your house and pay back your mortgage. Your lattes and vacations are not resellable.

    When did I say something about secured vs unsecured debt? speedwell made a point about paying a hefty fee for purchasing something you don’t yet have all the cash for. And I responded to it.

  23. azntg says:

    At Citigroup, a deal is a deal… but hey! I never said to who this whole thing is a deal. It’s buried under the fine print!

  24. synergy says:

    Maybe they need to stop extending credit to people that won’t be able to pay them…

  25. johnva says:

    @synergy: That’s exactly what they’re attempting to do via universal default, to be fair.

  26. johnva says:

    @johnva: Or rather, I should clarify, that’s what they’re doing if the result of universal default is to cut credit lines or close accounts. It’s not exactly the same thing if they’re just jacking up interest rates on people who are carrying a balance. Although one might say that that is one way of discouraging people from borrowing more money on their credit cards…

  27. Invalid_User_Name says:

    That’s okay….I would NEVER reinstate Citibank (or any credit card company).

  28. incognit000 says:

    The job of a company is to make money, and if they have to break laws, promises, contracts or rules to do so, who are we, the people being screwed, to judge?

    Oh, wait…

    On an unrelated note, I still bank with my university credit union. Yes, I have to do all my banking online, and I have to mail in checks to get them deposited, but they don’t screw me.

  29. MisterE says:

    They’ll sneak this through with a modification in their TOS agreement. Also, the lobbyist will push to keep some form of Universal Default legal.

  30. AmbiUbi says:

    Universal default is what basically helped make my decision to declare bankruptcy a few years ago (before it became impossible to do so) all the easier. I was late on one card that got lost in the shuffle when we moved cross-country, and that rippled into all my other cards, increasing my minimum payments each month by double and in some cases, triple the amount….

    I had way too many credit cards at the time, which was my fault (I was not a good consumerist at the time), and although I couldn’t afford to pay them off each month I would still pay at least the minimums, and was never late once. It was if they were just waiting for an excuse to up my rates, and once they had that, it was game over, and they all followed suit.

    Credit card companies aren’t the only ones who look into the whole concept of universal default though, AFAIK….it got to the point where my car insurance rates weren’t as good as they could be because apparently having a lot of credit card debt also makes me a high risk driver, even though I’ve never been in an accident nor had a ticket in 10 years of driving. But lo and behold, there it was on my insurance quote: “We cannot give you the best rates possible due to the amount of debt to income ratio you currently have”.

    It was after seeing that that I decided to declare the bankruptcy. Best thing I ever did, and it will be off my credit in 2 more years.

  31. johnva says:

    @AmbiUbi: The insurance thing is not because they think that having credit card debt makes you a worse driver. It’s because they think that it makes you more likely to file a claim for minor damage to your car or whatever instead of just eating the costs yourself. People who don’t have as much debt are much more likely to do the latter, probably because they’d rather just pay for it than take a hit on insurance rates later and deal with the hassle of making a claim.

  32. AmbiUbi says:

    @johnva: Well, I guess I understand that line of reasoning…but still, no accidents or claims existed to prove that I would do something like that, they just assumed, and there was nothing I could do about it….

    And it was just interesting/infuriating that they raised the insurance rates on me AFTER the universal defaults started to kick in.

    Not to mention that I personally don’t feel that credit history has any reflection on what kind of driver a person is… considering I got into all the debt in the first place by being laid off, not due to risky lifestyle choices.

  33. johnva says:

    @AmbiUbi: I don’t think it’s likely a reflection on whether you’re a worse driver at all. From the insurance companies’ greed-based POV, they don’t really care about that, directly. They only care about how likely you are to cost them money in claims. And I can see why people who are more financially overextended would be more likely to file claims under comprehensive policies, because they have fewer options available to them other than relying on their insurance. I can definitely see why people see it as sort of unfair, but I’m just explaining what the insurers reasoning seems to be.

    And while you may not have been the one to cost them more money, it’s probably statistically true that it’s a group of people with a higher rate of claims.

    I also don’t think that was directly related to universal default. The insurers get their own insurance risk credit score that is based on a look at your credit report. Perhaps you had some accounts closed, or credit lines reduced as part of the universal default? That would increase your credit utilization ratio, which might have pushed you into a higher-risk insurance category.

  34. ogman says:

    Why the hell hasn’t Congress done something about the predatory practices of credit card companies?

  35. barty says:

    @ogman: Ahh…I’m shocked it took this long for someone to come in with the, “Why doesn’t the government do something about it?” line.

    Probably because 1) Nobody is putting a gun to anyone’s head to take out a credit card and 2) People should READ what they’re getting into and not start whining when the big bad credit card company decides to change their policies at random, which you agreed to when you signed your name on the application.

    In other words, it isn’t the government’s job to come bail your butt out because of poor personal decision making. If you don’t like playing the credit card company game, there is a VERY simple solution. STOP USING THE DAMN THINGS!!

  36. johnva says:

    @ogman: Well, they sort of did. They didn’t pass a law, but by having hearings on this stuff they successfully pressured some of the credit card companies into voluntarily stopping some of the practices that people most often complain about (universal default, 2-cycle billing, etc). Of course, we’ll see what those promises were actually worth. But they did do *something* that helped, at least a little bit. More than you can say about all the Republican Congresses before them.

  37. linlu says:

    And in other news… [blog.wired.com]

    Gee I guess that is one way to pay for that.

    Oh and they need to pay for this as well: [money.cnn.com]

  38. Maybe Citigroup should just keep their pledge because… it’s the right thing to do?

    Okay, okay, sorry! I didn’t mean to make anyone laugh so hard they might be in danger of injuring themselves. Sorry.

  39. Oh, also, Citigroup did this hoping that Congress would forget about the legislation…