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.
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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:
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- 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% 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% 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% 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% 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 class action.
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 representative said.
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% of the balance associated with the item is paid. 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.
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 possessions.
"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 costs
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."
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% 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% 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.org.
"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% 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.
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