Numerous credit cards, including some big-name store cards, allow
the lender to seize items you bought if you don't finish paying for them, an
analysis by CreditCards.com found.
Card debt is often described as "unsecured debt," meaning
the loan is not backed by property. This
is a common explanation for why interest rates on cards are higher than other forms of debt,
such as mortgages and auto loans.
But numerous cards -- even some medical cards used for healthcare purchases -- hang the threat of repossession over your goods, according to card agreements filed with regulators. More than 200 publicly filed card agreements give the bank a "security interest" in purchased items as of late 2013, not counting secured cards for rebuilding credit. Capital One-backed store cards from Costco, Big Lots and Guitar Center contain the clause, for example, as do some
general-purpose cards issued by Wells
Fargo's high-rate lending unit Wells Fargo Financial.
The repo rights -- which remain in effect even if you file bankruptcy -- are one of the easily overlooked clauses in card agreements. Most people
sign up for credit cards based on the interest rate or the reward program,
skipping past other terms.
"People say, 'Oh
my God, I didn't know I was agreeing to that,'" said Paul Donohue Jr.,
president of Debthelper.com, a Florida-based credit counseling service.
"But they are, every single time they sign a receipt."
Using text analysis software and manual review,
Creditcards.com examined 1,600 card agreements filed with the U.S. Consumer
Financial Protection Bureau for the third quarter of 2013, the most recent
period available. Of that total, 450 showed changes from the previous quarter, and we analyzed those changes. Here's what we found:
No-interest promotions are gaining ground. Cards that let you put
off interest payments for six months or longer -- chiefly store cards and
medical cards -- are showing up more often. Language linked to these deals, which
charge built-up interest if you miss a payment, appeared in 15 percent of
new card agreements in the third quarter, up from 9 percent in the previous quarter.
The CFPB called these cards an "area of concern" in an October 2013 review of the impact of credit card protections.
Variable rates rule.
About 70 percent of agreements have text indicating they use variable interest
rates tied to the U.S. prime rate, and a few link rates to Europe's LIBOR index.
Only about 12 percent of template card agreements indicate they have a
fixed-rate option, which may only affect some holders of those cards.When interest rates begin rising sometime in 2015, the costs of carrying a balance will go up for the vast majority of cardholders.
Courthouse doors are
closing. Of the 450 updated agreements filed in the third quarter,
nearly half contained arbitration clauses, up from about 40 percent in the
second quarter. A mandatory arbitration
clause blocks you from going to court if you think your card is acting shady,
and it stops you from joining forces with other disgruntled consumers in a
How repo clauses work
Card language giving the lender repossession rights became less
widespread during the period, as Best Buy store cards dropped their security
interest clause. The change came as Citi
acquired the Best Buy card portfolio from Capital One, with a reported $7 billion in balances. Although Citi now collects the balances due on the cards, it does not have a claim on
goods that were bought when the previous agreement was in effect, a Best Buy
People say, 'Oh my God, I didn't know I was agreeing to that.' But they are, every single time they sign a receipt.
Paul Donohue Jr.
Security interest clauses undercut protections against
the seizure of household goods by creditors, consumer advocates said. Belongings subject to the clause are not protected by bankruptcy law or state debt collection laws designed
to keep debtors from becoming destitute. A purchase money security interest typically
allows repossession until 100 percent of the balance associated with the item
In some card agreements, the security interest phrase
is unexplained, leaving the repossession threat unclear.
The security interest language in some Capital One-backed store cards gives
the bank a claim on payments from insurance or extended service contracts, as well as on merchandise. The term also makes
the cardholder bear some of the responsibility for returning purchases.
"If we take back any good, we may charge you our costs
and require you to make the goods available at a convenient place of our choice
as allowed by law," the security clause states. Capital One also asserts the right to contact cardholders via personal visits, including at home and work.
Store card issuer Comenity Bank requires a security interest on your purchases from its Healthiplan Medical Credit Account, as well as numerous store cards ranging from Abercrombie to Petland and Victoria's Secret. GE Capital, the largest issuer of store cards, uses a security interest on just four cards, used for buying lawn mowers and other outdoor equipment, according to regulatory filings.
A potent threat, rarely enforced
Unlike mortgages and auto loans, threats to seize the
collateral behind credit card loans are rarely carried out, according to the
National Consumer Law Center and other experts. Repo men need a court order for the sheriff to
enter your home, and it is difficult to resell people's used
"To be frank,
nobody wants the stuff back," said Daniel Kreis, director of portfolio
management with bank industry consultant First Annapolis.
However, the threat of
repossession is more valuable as a collection tactic than the used goods
themselves. Collectors use the legal claim as leverage to obtain a settlement check, consumer lawyers say, and debt-strapped households may pay rather than risk losing the fridge, TV or a laptop used for work.
Whether repossession threats are serious "depends on the dollar amount -- they probably could give you some trouble on it," said Jay Nixon, a bankruptcy attorney in Wisconsin. He recommends that clients offer to pay the market value of the used item, a fraction of the demanded amount. Although the likelihood of repossession is low, a collector could push civil action or even criminal theft charges, for ignoring claims on secured property.
While it drops the security interest, the new Best Buy card
agreement adds a mandatory arbitration requirement. The clause means you must take
a dispute to a private arbitration company rather than court, and bars you from
joining forces with other consumers in a class action.
The overview of terms in card agreements is made possible by
new regulatory requirements. The Credit CARD Act of 2009 requires consumer
credit card agreements to be posted publicly, and the Consumer Financial
Protection Bureau publishes template agreements for
consumer cards on its website. There are exceptions for limited, market-testing
cards and special purpose cards with fewer than 10,000 accounts, which don't
have to file.
Changes in the template agreements filed by issuers don't
necessarily mean that the offer tailored to an individual has changed. Many
changes affect only new applicants for a card, or people with great or poor
credit. You should receive notice of any changes in the terms governing your individual
card, and you can check with the issuer for a copy of your specific agreement.
Fees quietly raise
Changes in fees can hike a card's costs without affecting the
closely watched interest rate, and some fee hikes appeared in card agreements
during the third quarter.
On some of its general purpose consumer cards, Citi
eliminated a break on late fees for people who carry a low balance. Under the
old agreement, first-time offenders were charged a $15 late fee if their
balances were under $100. The third-quarter template agreement now dings
everyone $25 -- the 2013 regulatory maximum -- regardless of balance. The hike
did not affect the Citi Simplicity card.
Eliminating the break for low balances could increase hardship
for people whose resources are already stretched. However, consumer advocates
said that lower fees for lower-tier balances are more window dressing than
reality. Research by the Center for Responsible Lending "pretty much concluded the lower-tier
numbers rarely got used anyway," said Ellen Schloemer, executive vice
president of the consumer group. "Most people who paid those fees had higher-tier balances."
CHECK YOUR CARD CONTRACT
Are your credit card purchases subject to repossession until you pay them off?
To find out, check your card agreement for the phrase "purchase money security interest." This term indicates your goods can be sized, even if the repossession right is not explained clearly.
The U.S. Consumer Financial Protection Bureau keeps a database of card agreements from most issuers on file at a searchable Web page.
To obtain a copy of your individual card agreement, contact the issuer's customer service department.
There can also be fees for increasing your credit limit, whether
you ask for the increase or not. These clauses appear in just 26 card
agreements in the third quarter, relatively unchanged from the second quarter.
Generally these fees are linked to subprime cards, such as one from First
Premier Bank with a 36 percent interest rate and a pre-account opening fee in
addition to an annual fee. The fee for the credit limit increase on this card
equals 25 percent of the increase, the contract states.
Although the federal CARD Act made credit card deals more
clear in general, complex fee structures
still make it difficult for consumers to understand card costs, said Kevin
Maher, community outreach coordinator with DebtHelper.com.
"The consumer really isn't equipped to make a decision
based on what the cards are really costing them," Maher said.
At least card agreements are getting easier to understand, according
to the CFPB's October 2013 study. Since
2008, the average agreement has shed about 2,100 words, a 24 percent slimming,
and the readability level has improved, the bureau found.
Despite the improvement, Maher said that some debtors he counsels
still react with shock when they plumb the terms of their card agreement. Card
issuers "are always going to find different ways to market things, bury
things," he said. "The agreements aren't that long ... Make
sure you know what you're getting yourself into."
CreditCards.com research assistant Allie Brady contributed to this report.
See related: Credit CARD Act II coming?