Column: Does your credit card contract contain a hidden surprise?
Like most of us, Larry Maizlish seldom scrutinizes the pages of fine print that accompany his credit cards. The other day, however, he decided to give it a go for his Lexus Pursuits Visa card, which offers points for vehicle repairs.
“I had the time,” Maizlish, 53, told me. “My eyes were feeling good.”
That was fortunate because he had to dig deep to come across a nasty little stink bomb planted by the card’s issuer, Comenity Capital Bank.
About halfway through the pages of legalese, after the usual boilerplate about Comenity being able to change the terms of the contract any time it pleases, so there, Maizlish found this:
“You grant us a security interest in all goods you purchase through the use of the account, now or at any time in the future and in all … proceeds of such goods.”
That’s a fancy way of saying that Comenity reserves the right to send guys to your home and take any stuff you’ve purchased with your card if you don’t pay your bills.
And if you’ve maybe sold the stuff on EBay, they’ll take the cash you earned.
Call it the Sopranos clause.
“I wouldn’t have even known it was there if I didn’t make the effort to read the whole thing,” Long Beach resident Maizlish said. “It’s kind of hard to believe.”
Hard to believe because credit cards traditionally have represented what’s known as unsecured debt, meaning no collateral is required to receive the loan. If a borrower fails to make payments, the lender has few choices except to negotiate a settlement for less money or file a lawsuit.
Secured debt, on the other hand, is guaranteed by collateral. Car and home loans are the most common forms of secured debt. Miss your payments and adios wheels, sayonara house.
Comenity is securing its credit-card loans with all the goodies cardholders put on plastic.
This kind of thing fell out of favor among many card issuers in the 1990s, after Sears paid $273 million in refunds to customers to settle charges that it used a security interest provision to unfairly muscle people into making payments.
Comenity, however, has stuck with the practice. The company is a leading issuer of store cards, including for retailers Ann Taylor, J. Crew and Pottery Barn.
“I’ve never heard of anything actually being repossessed,” said Linda Sherry, director of national priorities for the advocacy group Consumer Action. “But these cards make it clear they can do it if they want.”
Think of it as leverage. Some people might think they can get away with not paying their credit-card bills, unfazed by the prospect of having their credit score go down the toilet.
But those same people likely will sit up and take notice if faced with the explicit threat of losing their flat-screen TV or washing machine or refrigerator.
“That doesn’t mean the store or bank is actually going to do it,” said Douglas Crowder, a Los Angeles lawyer specializing in consumer debt issues. “It’s all about the threat factor.”
They’d really send repo guys to a cardholder’s home?
“If it was a large enough purchase, it might be worth their while,” Crowder replied. “For anything with a resale value of less than $2,000, say, it’s hard to imagine they’d go to the trouble and expense.”
A Comenity spokesman, Larry Meltzer, declined to address whether the bank would dispatch repo men to cardholders’ homes.
He said only that “the security interest clause in the terms of Comenity’s credit card agreements is designed to preserve rights it may have under applicable laws.”
Bankruptcy is a key consideration. Under most Chapter 7 bankruptcy filings, much of a consumer’s outstanding debt can be erased.
During bankruptcy proceedings, consumers are asked if they want to “reaffirm” their secured debt. In other words, will they commit to keep paying off their car or home loan so they won’t lose the property?
“Credit cards with security interest provisions are a way for these lenders to get on the list of reaffirmed loans,” said Chi Chi Wu, a staff attorney at the National Consumer Law Center. “Reaffirm our debt or lose your TV. It’s a way to scare you into staying on the hook.”
That’s not to say these are idle threats. While the chances of a store or bank trying to repossess an electronic device or appliance seem low, it can happen. So don’t just dismiss any such warnings as bluffs.
Still, you do have rights. Section 9609 of the California Commercial Code says collateral only may be collected by a creditor “without breach of the peace.” So obviously no rough stuff is allowed.
Repo men can’t enter your home without permission. If you slam the door in their faces, the creditor’s sole alternative is to turn to the courts. Its willingness to do so will depend on the value of the item — cheaper goods simply won’t justify the legal costs. But pricier items, and not just diamond rings, might be sufficient to get lawyers involved.
“People are purchasing a lot of very expensive appliances for their homes — $5,000 stoves, $7,500 refrigerators — and they’re putting them on plastic,” Sherry observed. “If you bought a bunch of appliances together, the store is going to want them back if you don’t pay your bills.”
To find out if your credit card contract has a security interest provision, try looking it up in a database of card agreements maintained by the Consumer Financial Protection Bureau.
If you have a store card, you can also search Comenity’s own site to see if it’s one of theirs.
Maizlish, with that Comenity-issued Lexus Pursuits card, said he used his plastic for some recent home improvements.
“I guess if I don’t pay my bills, they can come and rip out my windows or take out the rear patio,” he said.
He doesn’t think this would ever happen. But just to be safe, he’s contacting Comenity and seeking written clarification of the company’s intentions.
“If they won’t provide it,” Maizlish said, “there’s no reason to keep using this card. There’s no shortage of other credit cards out there.”
David Lazarus’ column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5 and followed on Twitter @Davidlaz. Send your tips or feedback to firstname.lastname@example.org.
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