Got a fee-related complaint for your bank? Your bank's got a message for you: You agreed to it – live with it.
Over the past year, the consumer banking industry has come under increased scrutiny in Washington for interest-rate hikes, questionable legal practices, and debt-collection procedures. And when bank representatives appear before Congress, they often repeat the same message: Whatever their practices, their consumers agreed to them.
Of course we did. Unless we want to hide our money under our beds, we have little choice but to play by their rules. But if you're like most, you've thrown out your checking-account or credit-card contracts long before you read all of its legalese.
And it's not as if financial institutions are scrambling to draw your attention to the contracts. In some cases, consumers have to blindly agree to a credit-card holder's agreement when applying for a card; and only get a chance to look at it when they receive it, their new card, and a bevy of inserts in the mail sometime later.
Figuring out what it all means can be difficult. Interest rates can be calculated in a variety of ways, and the ultimate effects of certain clauses aren't always clear. "It's getting to the point where it's like opening up the guts of a Dell and a Mac and asking to choose based on that," says Kathleen Keest, senior policy counsel for the Center for Responsible Lending.
But what you don't know can hurt you: You may assume you have rights that you've actually signed away, and knowing what the rules are now can save you major financial problems later on.
To help, we're magnifying the small print. Here is a by-no-means-comprehensive list of common clauses to be aware of before signing up for that next credit card or checking account:
1. Your bank gives you access to money, and your bank can take it away.
Got a fishy check? Just because your bank gives you access to the funds, doesn't mean the check is good. Banks follow federal laws, which require them to give you access to your money after a certain number of days, often before they verify that a check is valid. If the check turns out to be bad, then you – not the bank – will foot the bill.
Banks let you know that it's your responsibility to ensure the check is good on the account holder's agreement, or even sometimes on the deposit slip itself. But those who don't realize that money in their pocket isn't necessarily money in the bank are easy targets for check scammers, who entice their victims to wire away money with promises of winning a lottery or asking for a favor after "overpaying" for a product they found online.
2. Your bank may be holding your money, but it doesn't mean they're guarding it.
What's left out of savings account agreements can be as important as what's put in. Under federal law, Social Security funds and some other benefits can't be garnished by creditors. But many banks in most states respond to legal restraining orders on money in an account without checking to see if it can be legally garnished. Eventually the funds may be released, but in the meantime, banks charge you for it: Restraints on accounts can cost as much as $100, and then account holders are subject to bounced-check and over-the-limit fees.
3. Your debit card probably doesn't know when to say "when."
If you overdraw on your bank account – even by a few dollars – you've opened yourself up to a whopping fee. Instead, Ms. Keest suggests asking your bank if they'll give you a written agreement for an overdraft loan, which typically has a much lower interest rate than the lump fee banks would otherwise charge you.
4. Your credit-card interest rate can skyrocket, regardless of payment history.
Paying bills faithfully isn't enough to keep interest rates low. Depending on your credit-card agreement, rates can rise if your credit score drops for an unrelated reason, such as taking out additional credit lines. Why? You guessed it: They want to be able to raise your rates and you agreed to it in the contract.
"[C]redit card lenders need to consider a borrower's total credit picture in evaluating the likelihood of future default," wrote Roger Hochschild, Discover Financial Services' president and CEO, in a statement prepared for a hearing on credit-card company practices held Dec. 4 before the Senate Committee on Homeland Security and Governmental Affairs. "Card members are informed of the manner in which their APRs may change in the card-member agreement they receive at the time the account is opened."
Some creditors apply the hiked-up interest rate retroactively to money borrowed at a lower rate. Consumers always have the option to close the account, but there are still ways to engage in safer credit practices. Linda Sherry, Consumer Action's director of national priorities, recommends staying below 50 percent of your credit limit to avoid a drop in credit score and an increased interest rate.
Some bank credit cards have eschewed the practice of jacking up interest rates when borrowers pay on time. Citi Cards, for example, announced last March that they would do away with "any time for any reason" rate and fee increases. Instead they'd only increase a customer's interest rate if he was late paying his Citi Card bill. In November, Chase announced that it would stop increasing cardholders' credit-card interest rates when their credit bureau scores declined.
But keeping up to date with credit-card company practices can be a daunting task. Consumer Action (www.consumer-action.org) periodically surveys credit cards and publishes a rundown of their billing practices.
5. Paying late opens fee floodgates.
"Never pay late," says Ms. Sherry. "You pay late, you've broken the contract that they consider to be sacred. You open yourself up to all kinds of bad things – raised rates, fees, etc."
Interest rates can increase, and in some cases, interest may be charged on the portion of your bill you already paid. And then you get hit with fees: late fees and over-the-limit fees can exceed the amount you owe. Keest says some creditors will allow you to avoid over-the-limit fees by calling in advance and asking that the issuer decline any over-the-limit charges.
6. The Constitution gives you the right to a day in court, but you also have the freedom to sign that away.
If you have a credit card, you've almost certainly agreed to settle disputes through arbitration, a private dispute-resolution system. Arbitration clauses are among the most prominent in card holders' agreements. So if your credit-card company determines that you owe them money, be aware that you may not be disputing the case before a judge, but before someone who works for a private group often chosen by the bank.
7. Rules are a moving target.
Many can change anytime, for any reason. "Even though creditors can stipulate the terms, they still insert a clause that says no matter what else is in the contract, we can change the provisions anytime for any reason," says Travis Plunkett, legislative director of the Consumer Federation of America. "[Credit-card agreements] are the single worst piece of consumer disclosure I've seen in 25 years of consumer work."
So keep your eyes peeled for notices and opt out when you can. Even when you can't – sometimes opt outs may involve paying an account off in full – you may be able to negotiate better terms.