BizWeek Takes on Confusing Contracts

BusinessWeek uses the administration’s plan to crack down on credit-card companies as a jumping-off point to look at how it got so easy for them to abuse their consumers. One big reason: Contracts that let banks change any term at any time.

Contracts weren’t always so easy for banks to change. That changed, in part reporters Brian Grow and Robert Berner say, because of the chase for subprime customers:

The credit-card industry expanded rapidly in the 1990s as mainstream banks such as Citi, now a unit of Citigroup, competed with nonbank financial firms including Providian and Capital One (COF) for customers who historically would have been denied cards because of their shaky credit histories. More companies offered rock-bottom introductory rates that were replaced with much higher ones. Banks and financial firms began relying on fine-print provisions that allowed them to change terms at will, says (Duncan) MacDonald, now an independent bank consultant.

The mag goes into some history of the plain-language movement led by Ralph Nader a few decades ago. It’s clearly failed.

“Fifty lines of text explaining how interest rates will be calculated before concluding ‘We reserve the right to change the terms at any time for any reason’ is not disclosure,” said Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, in a Mar. 11 speech. “That’s obfuscation.”

BW throws in some nice nuggets on what a swell industry this is:

In a November 1997 memo, MacDonald, then one of Citi’s most senior lawyers, warned against adopting Providian’s strategy of “penalty pricing,” which involved charging consumers who made late payments steep fees and hiking their rates. “I was asked to resign three days later,” he recalls. Penalty pricing became standard throughout the industry. Citigroup declined to comment.

It’s not just credit cards that take advantage of the lack of consumer-protection in this area, as BW points out:

Sprint Nextel (S), the wireless titan, uses its change-in-terms provision to extend customers’ two-year phone agreements without asking them. Or at least that’s the allegation in a pending civil suit filed in 2007 by Minnesota Attorney General Lori Swanson. The company unilaterally renewed contracts whenever customers disputed bills, purchased new phones, or received “courtesy discounts,” the state AG alleges. If customers tried to cancel, they were hit with hefty fees. “Essentially what [Sprint] is doing is changing terms [as if there weren’t] any contract at all,” says Swanson.

But, of course, these things (thankfully) don’t just affect “subprime” consumers: Read poor people who don’t know any better and can’t fight back. Here’s a nice, middle-class professor who can make noise at least:

Shifting credit-card fees and payment terms are one of the most widespread causes of consumer angst. In September 2006, Robert J. Lahm Jr., juggling student loans and medical bills resulting from the premature births of two children, transferred $20,250 in high-interest card debt to a new card offered by Chase. The bank’s pitch promised a 3.99% fixed rate “until the balance is paid in full.” Lahm, an associate professor of entrepreneurship at Western Carolina University in Cullowhee, N.C., paid down the debt to $11,500 over 2 1/2 years. He says he never had a late payment.

In December he received a letter from Chase stating that he would be charged a new $10 monthly service fee and that his minimum payment would rise from 2% of the balance to 5%. “I literally became sick to my stomach,” Lahm says. The change meant his minimum payment would increase from $240 per month to $550. Lahm says he dipped into a retirement account to pay the higher bill. “With the credit-card industry playing hardball,” he says, “it is an issue that affects all of us.” He has started a Web site on the topic:

Oughta be illegal. Soon it will be. Good for BusinessWeek for writing about it.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.