Wednesday, November 15, 2006

An interesting legal argument against credit card contracts

See the responsive comments by Kevin LoVecchio (klovecchio) in response to commenter Gnopple. He makes some good legal points regarding credit card contracts not being valid contracts under traditional contract law.

From the comment:
Moreover, if you read my prior post on this subject that (linked to above) you'll notice an even bigger problem: the changed contractual terms typically
apply retroactively to balances you already carry. Your comment references this point and suggests that it should be against the law, but it currently is considered acceptable practice. In other words, if you have a $5,000 balance and the credit card changes your terms to say that your 0% promo rate is bumped to 29%, your late fees increased twofold, and your minimum monthly payments doubled, these changed terms apply to the balance you already carry. Using our imagination again, pretend you went to the store and purchased a CD for $10. How would you respond if the store called you a week later and demanded an extra $5 for the CD long after it was purchased? Applied to credit cards, imagine you want to purchase a $3,000 flat panel television but don't have that much cash on hand. You calculate that you can afford an additional $250/mo., so you sign up for a credit card with a 0% promotional APR for one year and purchase the television with the expectation of making those payments for twelve months until the balance is paid down. One month in, your credit card company terminates your promo rate and hikes your standard APR to 20%. Suddenly, your purchase price for the $3,000 television just jumped to $3,600 (ignoring compounding penalties and fees), long after you made your purchase.

One final point. I would argue that this isn't a contract at all. If every single term of the contract is subject to be altered or removed at any time, upon the unilateral action of one party, then what terms did I agree to? The law has a name for this, and it's an "illusory" contract. An illusory contract appears to be a contract but in fact is not legally enforceable because it lacks at least one essential aspect of a contract; in this case, it's lacking all aspects of a contract because there isn't a single term written in stone that can't be changed at the whim of the party. In the simplest sense, this is no different than a "contract" that
states only "I'll give you $10 if I feel like it," which is no contract at all.

1 comment:

Teri said...

I've always wondered about that. I can't think of any other loan where they can just change the terms without notice. Banks can change their rates but it's not the same thing.