Thursday, May 7, 2009

If You Lose Your Job, You’re Screwed

This is an exercise in reading the fine print of a bank’s credit card terms. I won’t name the bank, as its new terms are more favorable to the cardholder than you will find at most major banks. Yet they are still scary enough to make you say, “I think I’ll use my debit card instead!”

These terms came in an 18-page pamphlet with more than 600 words per page, giving it a word count near 11,000 words. I have read novels shorter than that. The fine print, arcane language, and considerable length don’t really encourage you to read the whole thing, but if you do, your reward is to discover things like this. On page 12, under the heading “DEFAULT” you see the bank’s list of things that might happen that would lead the bank to conclude that you had not lived up to your side of the agreement. These include:

We do not receive a required Minimum Payment Due . . . on the payment due date . . .

You exceed the credit limit.

We have reasonable cause to believe you will not be able to repay us . . . for any reason, including but not limited to notice that you have become unemployed.

You die, become imprisoned, are declared legally incompetent . . .

And it goes on for five more paragraphs. But let’s focus for the moment on the key word “unemployed.” This just means you lose your job. And the way it’s written, it might include quitting your job to take another job, if you take one day off between the two jobs. To the bank, this is the same as if you die or go to jail.

What happens then? The bank can cancel your card and demand immediate payment of your entire balance:

In the event of default, we may terminate your Account as provided in Section 7 below, accelerate the unpaid balance and commence collection activity.

If you lose your job, you’re screwed. It’s not just that the bank might decline your credit card purchases — it’s worse than that. If the bank finds out, or even if it reasonably believes you have lost your job whether that actually happened or not, it can demand that you pay back all the money you owe it that same day. There is no question about this if you read what it says in section 7, which includes this:

If you are in default, we may close your account and require you to pay us immediately the entire amount you owe under this Agreement, in full.

And don’t even think about saying, “What do you mean? Where am I supposed to come up with $3,000 today? Can’t you wait till I get my paycheck on Friday?” If you don’t pay right away, the bank can sue you and then you will be obligated to pay its lawyer:

We may refer any past due amounts you owe under this Agreement to a collection agency or lawyer for collection, in which case you agree to pay us our reasonable costs of collection, including without limitation collection agency fees, court costs and attorneys’ fees actually incurred by us, to the fullest extent permitted by applicable law.

You can’t control when you might lose your job, so the only way to protect yourself from this scenario is to have money on hand, enough to cover the full amount you owe on the credit card at any moment so that you can send it to the bank immediately whenever it might ask for it. Of course, if you can do that, then what is the point of the credit card? If you have to have the money before you can spend it, isn’t it just as easy to use a debit card?

The credit card terms I’m quoting here might seem harsh, but most banks have stricter terms than this. Some of the largest banks include a “universal default” provision, under which they will change your interest rate, and potentially put your account into collection, if the bank thinks you are late in paying back your mom.

Part of the appeal of credit cards in decades past was that it was a relatively safe way to borrow money. You could spend money several weeks before you had earned it. But the fine print that goes with credit cards has changed. Legally speaking, in 2009, it is not safe to owe money on a credit card. Owing money to a bank on a credit card account is not necessarily safer than owing money to a loan shark because in either case, the amount of money you owe, the interest rate you have to pay, and the date when the payment is due depend on the lender’s opinion of you.

That is not a good position to put yourself in. And the credit card reforms that Democrats in Congress are considering, and Republicans are opposing, are really quite timid and won’t change much about this. It probably shouldn’t be permitted in a contract for so much to depend on one party’s opinion of the financial condition of the other party, but the law does seem to allow that, and as long as credit card terms are written this way, spending ahead on a credit card is a calculated risk that most of us are better off not taking.