What happens under a universal default clause?

A universal default clause is a provision in credit agreements that allows lenders to increase an interest rate if the borrower defaults on any of their financial obligations, not just those related to the specific loan or credit account in question. This means that if a borrower makes late payments on one credit account, the lender may view this as a risk indicator and subsequently raise the interest rate on other accounts or loans held by the borrower, even if those accounts are in good standing.

This practice can lead to higher costs for the borrower across multiple accounts, as the increased interest rates may be applied broadly. Thus, the correct answer focuses on the consequences of late payments triggering a rise in interest rates, illustrating how interconnected various credit obligations can be under a universal default clause.