How are credit cards like dominoes? If one gets off balance, it can send the rest of them off balance as well. As you already know, missing payments is bad for your credit. Your score will suffer if you have too many late payments or recent missed payments. However, it's not just your score that will suffer.
Credit card companies constantly check your credit reports to see how you are doing. These inquiries are soft pulls which don't affect your credit score. They want to make sure that you are not getting too crazy with your obligations elsewhere. From their perspective, if you get in over your head, you're likely to default on the money you borrowed from them.
How often do they check your credit? It depends. Some lenders check monthly or quarterly, while others check once a year, if that. You can generally assume that the bigger organizations (like large credit card companies) will check your credit more often. Small, hometown establishments like little credit unions are likely to check less often, but you never know.
What happens if these inquiring minds find a problem on your credit reports? Things can get out of control really fast. Of course, it depends on the lender, and your agreement with that lender. With many credit card accounts these days, you have a universal-default clause in the contract. Nevermind if you don't remember reading that in your original contract, credit card contracts change all of the time. The disclosures you receive periodically in the mail is probably where you will find some language about your universal-default clause.
So, what does universal default mean to you? It is a fancy way of saying, “If you mess up one of your accounts, you might as well have messed them all up.” Assume you have several credit cards: Card A, Card B, and Card C. For whatever reason, you miss a payment on Card A. Surely, the Card A company will not be happy about this. They will slap the customary late payment fee on your account and send you a letter warning you not to do it again. They even go so far as to report the late payment to one of the major credit-reporting companies. No big deal, right?
Actual language from a credit offer disclosure: “We may change the rates, fees, and terms of your account at any time for any reason. These reasons may be based on information in your credit report, such as your failure to make payments to another creditor when due, amounts owed & or the number of credit inquiries.”
If you have universal-default clauses over at Card B and Card C companies, it is a very big deal. On routine maintenance checks, the Card B and Card C companies notice that you made a late payment to Card A. As a result, they raise your rate much higher than it was the day before (perhaps they start charging you 30 percent now). You never made a late payment to Card B or Card C, but they're raising your rates. Why? Universal default.
The concept of universal default is this: If you default anywhere, you default here. Your credit card company is telling you not to default on anybody else's debt. Otherwise, your credit card company will take it personally, and assume that you meant to default on their debt. In your contract, you will notice what happens if you miss a payment. Typically, they explain how they will take away any promotional rates and raise your rate.
If you have a meaningful amount of credit card debt, you can imagine how the situation would quickly spiral out of control. Because you miss a payment on Card A, Card A, Card B, and Card C would raise your rate. As a result, the amount of money you owe them would increase more rapidly, because of high-interest costs. Next, you'd have a hard time paying Card B. Card B charges a late fee, which adds to your balance, and so on. Ultimately, you might have to default on one or more of the loans. This scenario would be very bad for your financial health and your credit history.