You may have heard the recent news about how Capital One is changing its credit card terms of service to add a very controversial provision that the credit card company can “contact you at your home and at your place of employment,” and can do so in any way they choose, including making a personal visit. Naturally, the idea of some stranger showing up at your door asking for money horrified people and has caused Capital One to rethink what is obviously a ridiculous contract provision.
Needless to say, Capital One’s image suffered a pretty hard hit when the news broke, and I’m sure they’ll receive less credit applications during the next few months than they otherwise would have, which means that they’ll make less money during the next few years because they’ll have few customers to lend to and collect interest and fees from. So it begs the question: why? The bank later assured us all that “Capital One does not visit our cardholders, nor do we send debt collectors to their homes or work.” Well if you don’t ever use this particularly contractual provision – one that has cost you millions of dollars in lost customers – why would you put it in your contract?
I don’t pretend to understand why banks do everything they do, but I do have enough experience dealing with them to form two theories on this one:
1. Their debt buyers want the language in their because it makes them scarier to people who are in default. If you’ve never been in serious financial trouble, you may not really understand this because you’re accustomed to thinking of credit card companies as people you send money to each month to pay for purchases you made the month before. But when you get really behind on your payments, you see a different side of a credit card company: collections. Most of the money that credit card companies make comes from people who aren’t in good financial shape. That’s why AmEx charges annual fees on all their rich-people credit cards. Banks don’t make money off people who just pay everything on time. Look at the fees you get from a minimum payment borrower, though: 17.99% interest, late fees, over-the-limit fees, cash advance fees, etc. And once you’ve fallen below the surface of collectability, you move into even less pleasant territory: debt buyers and collection agencies. These people buy your unpaid account for about $.06 per dollar. Yes, that’s right. 6 cents per dollar. That’s an industry average, and it is the price third party bill collectors pay Capital One for the privilege of hounding you for whatever they can convince you to pay.
The bad debt business is a huge industry – they were purchasing just over $100 Billion in bad debt per year before the bubble popped in 2008. Debt buyers make their money by scaring you into paying you more than you should. But they’re not allowed to lie, so in order to be as scary as possible without breaking the law, they want a contract that gives them the right to make all sorts of outrageous claims. And if Capital One can sell its bad debt for 8 cents a dollar instead of 6, they’re making millions of dollars extra from their nearly worthless accounts. So they have every incentive to make their contractual terms as abusive and ridiculous as possible.
2. Nobody reads the contract. The funniest thing about the outrageous “new” contract terms is that they’re not even new. Credit card contracts have had stuff like this in them for years, and nobody even noticed. As a consumer credit attorney, I was honestly shocked that some major news outlets actually gave the story some air time, because it wasn’t really news to me. I actually have had a Capital One credit card and I didn’t read the contract. I just assumed it had the same junk that every other credit card contract has: no rights for the consumer except those mandated by federal and state law, an arbitration clause, a class action waiver, and terms governed by the home state of the issuing bank.
If, while reading your credit card contract, your computer warranty, or your automobile sales contract, you find a particular contractual provision that looks like it is designed to help you and not the person selling or lending to you, you can bet that it is mandated by federal law. A great example is the $50 Maximum Liability for Fraudulent Purchases paragraph in every credit card contract. Read yours and you’ll see it say something like “If someone steals your credit card and makes purchases with your Card, Citi will hold you liable for no more than $50 for such purchases.” Wow, you think. What good customer service. And you’re wrong. That particular bit is required by the Fair Credit Billing Act and the Fair and Accurate Credit Transactions Act. The bank doesn’t have a choice.
The unfortunate reality of life in the United States is that if you don’t like being forced into horrible contract terms, you’re going to have to start bartering and living off the land, because pretty much everything you buy is bought under terms that give you no rights whatsoever.
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Thank you for your very helpful article. Even though I live in Louisiana you have answered some questions I have regarding debt collectors.