Reject Variable Terms and Conditions

By Philip Brewer on 12 September 2009 (Updated 5 October 2009) 10 comments
Photo: chelseagirl

Ordinary business transactions used to be governed by long-standing laws and customs that had been developed to make them fair to both sides. Over the last fifty years or so--basically, since credit cards became popular--those rules have been gradually pushed aside. Now, everything is governed by "terms and conditions" that the corporate party can change at any time. Do your best to avoid doing business on such terms.

Once in the 1970s and once in the 1980s, I "took out a loan" (as opposed to using a revolving credit agreement such as a credit card). In both cases, I borrowed money at a specific interest rate and had a fixed repayment schedule--which could not be changed by the bank, as long as I made the payments on time.

You can still borrow money that way, but most credit transactions are different now: they're done according to "terms and conditions" that let the banks change anything they want. (The new credit card law limits banks' ability to raise rates, but variable rates can still go up if the index goes up, and for most credit cards the index is the prime rate--which is a rate that is set by the banks themselves.)

What person in their right mind would agree to borrow money on terms that the lender can change at any time? Banks are corporations whose sole motivation is to maximize profits: They will always change the terms and conditions so as to suck the maximum amount of money out of their customers. It's what corporations do.

The only real limit on banks' terms and condition comes from competition. Although they make most of their money from their worst customers, the banks also make a tidy sum when people like me use credit cards for transactions, because the banks earn a fee on every transaction. A bank that changes its terms in ways that pinch those people (people like me) can lose profitable business--because people like me have other options. (I think the recent financial crisis has also reminded banks of the value of borrowers who actually pay back the money that's been lent to them.)

Competition has generally worked to help everybody, because institutions have historically had only one or a few broadly applicable sets of terms and conditions, each of which applied to a large numbers of customers. But institutions only did that because it was convenient for them. Now that the technology will support it, I expect that businesses will start to move toward individual terms and conditions.

Much the same way the airlines moved to having a different price for every seat on a plane, I expect that other businesses--eventually, all other businesses--will start to do the same. They'll try to lock you into their service, and then jack up the rates to whatever will suck the most money out of you.

It can get much worse, though--and I think it will.

Suppose a business wants to raise prices, but identifies you as a customer who will probably drop the service rather than pay more. Instead of raising its fee by just a few dollars, it raises its fee by tens or hundreds dollars, hoping that you'll fail to cancel before the new fee goes into effect. Sure it loses your business, but it would have lost that anyway. If you've agreed to terms and conditions that the business can change at any time, this is probably perfectly legal.

Business don't do this much, but just for practical reasons--they worry about bad publicity, they're doubtful that they'll be able to collect on that unconscionable last charge, they'd hate to lose a customer if they've guessed wrong about the maximum you'd be willing to pay, and because it's been difficult to manage unique terms for every customer. Technology means the last restriction no longer applies, and makes all the others weaker than they used to be.

You can't completely avoid variable terms. Many services are unavailable on fixed terms. But avoid them when you can--and always go into such a deal with your eyes open. Think:

  • What could the service provider change that would cost you the most money?
     
  • Can changes in terms affect you, even if you cancel immediately? (And if not, is the only reason they can't because of a provision in the terms of service that they could change?)
     
  • If you react as quickly as possible to a disadvantageous change, what's your worst-case loss?
     
  • How much time and effort will it take to track things closely enough that you can react in a timely fashion?
     
  • How much would it disrupt your life if you had to abruptly cancel a service whose terms and conditions became unacceptable?
     
  • Is there a better option--one that might cost a little more, but that would let you avoid a future disruption?

If you've agreed to terms and conditions that the business can change at any time, and you don't expect pretty much every business to change them to screw you in whatever way will be most profitable to them, then I think you simply don't understand what corporations are.

[Updated 21 September 2009:  This post was featured in the 17th edition of the Best of Money Carnival.]

[Updated 5 October 2009:  This post was featured in the The Best of the Best in Money and Personal Finance.]

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Guest's picture
Guest

that sums up what I am feeling about my bank recently but there is no solution, can not get a better service too. governments should not allow this I guess.

Guest's picture

I switched my regular banking to credit unions 35 years ago. I have always found staff to be friendly and knowledgeable. Credit unions exist solely to serve their members, not to pay high dividends to share holders. Credit union income is returned to members, offering higher deposit rates and lower rates on loans.

After being persuade by the bank to buy the wrong mutual funds once too often I switched that too!

Philip Brewer's picture

The way to protect yourself from this is to do things in the old ways.  Pay cash for stuff.  Write checks.  (Checks are still largely governerned by the old rules.)

Historically, the government has stepped in to control what terms corporations can set with regard to crucial services--water, power, etc.  It just hasn't caught up yet with new crucial services like data.

Where there's real competition, there are steps in the right direction.  For example, there are plenty of "no contract" cell phone plans available.  I haven't looked at any in detail (they probably still have terms and conditions written to screw you), but it's a step in the right direction.

Guest's picture
Guest

The fact that people continue to stick with the "banks that are too big to fail" amazes me. Fees for this, charges and surcharges, and fees on fees - mind blistering!

Credit unions are the only way to go.

Guest's picture
Guest

This doesn't completely avoid the problem, of course, but the most important thing about a credit card is: Never buy anything that you can't pay for at the end of the month. If you can't pay off the balance in full each month, you're spending too much. In other words, treat your credit card as if it was a debit card, while keeping the advantages of a credit card.

That avoids interest payments altogether. (Assuming you make your payments on time, of course.) If your card company decides to impose an annual fee, there dozens of other card companies you could switch to.

Guest's picture
Guest

If you're in any way eligible to be a member of a credit union and you have not yet signed up, you are a fool. Get out of that bank and get yourself into a credit union. Do it right now.

If, for some reason, you find yourself ineligible to join a credit union, let me give you a hint. Often universities will have a credit union attached for students, faculty, and alumni. Maybe you don't fit any of these credentials. But you can donate to the alumni association of the university, which in many cases will make you an "alumni." Now you're eligible to be a part of the credit union!

I will never go back to banks; my credit union is just too good.

Guest's picture

A friend of mine complained that the terms of her credit card had changed. They were raising her interest rate etc. I said "They own the credit card. If you don't like it I would stop using that credit card and shop around for one with better terms." I don't think she was very happy that I said that!

Guest's picture

I think the smartest way to treat credit cards in general as from my own personal experiences, is simply to pay off any remaining balance in any credit card by the end of the month so you won't have to worry about having to pay penalty or interest rate fees. Another option: just use a debit card that has a visa logo so you only spend what you currently have in your account. That is exactly what I now do.

Guest's picture
Edgar A.

Saying if you don't like the way your credit card company treats you, just get a different one sounds like a good free market solution. But people should realize that number and proportion of new accounts, number of recent credit inquiries, and length of time you've had an account are all factors in your credit rating, negative in the case of new accounts.

Sounds like another case where some re-regulation is called for.

Guest's picture
Guest

I whole-heartedly agree with Edgar. (#9)

Credit scores are held over people as a factor in so many cases where it is totally irrelevant. Getting car insurance, renting an apartment, even getting a job.

I propose, rather than re-regulation, simply outlawing the use of such data in all cases except the process of directly requesting a loan.

In addition the data contained in such credit histories should be completely accessible and updateable by the person in question. (With modern database design it isn't very hard to keep records in such a way that items can be flagged as incorrect and be removed from consideration until proven correct.)

And finally there needs to be a little more transparency as to the formula used to generate that magic number. If such a number can be the difference between buying a home or not, and paying extra interest for a car loan or not, then we have a right to know exactly how the agency came up with that particular number.

Credit card companies tend to be some of the worst when it comes to changing the rules after you agree to play the game. It is very frustrating when it seems that our only sane choice is not to play at all.