Saturday, February 28, 2009

Lifetime Promotional Credit Card Rates from Chase: Responses

My previous post on Chase Credit Card Services reneging on agreements for low promotional rates prompted several comments, including one from a Chase employee. The comment from the Chase employee is very telling about the mindset of the credit card industry both for what it says and what it doesn’t say. That person wrote:

“I work for Chase Credit Card Services and thought I should inform you that we didn't just announce these Changes in Terms last week. We actually sent notifications to effected card members back in November, so they were informed 45-60 days in advance. If you are going to writing an article from a negative standpoint and try to preach to other people, at least make sure you have your facts straight.”

The commenter is correcting my use of the phrase “last week” twice in my February 16, 2009 post to set the timeline of events. I meant “last week” to refer to the publication of the newspaper articles I cited about Chase’s change to its credit card terms. Instead I made it sound that Chase changed its terms the week prior. Had I published the post in November it would have been correct. I should have used the ambiguous word “recently” which would have left wiggle room in setting the timeline.

This comment is telling in that it doesn’t address the question posed in my post: Whose lifetime was referenced when Chase offered a “lifetime” rate on a balance? As another commenter pointed out:

“If they gave 45 days notice, or just two, it's still false advertising, and a violation of the Truth In Lending Act: the terms of the loan were ‘fixed for the life of the loan.’ ”

But the mindset of the Chase employee is that the credit card agreement allows Chase to change the loan terms at any time, for any reason, as long as a minimum of 30 days notice is given. I believe that is why my use of the phrase “last week” stirred outrage. My usage implied more than 30 days noticed had not been given—a time period I regard as immaterial but to Chase is the only obligation they have under the terms of the agreement.

Like a magician—and many political and corporate leaders—the comment from the Chase employee uses misdirection. Their actions are to holler loud and long about minutiae and hope nobody notices what is actually happening.

As Dr. Robert Lahm commented:

“Imagine that, a company that has previously testified before Congress about playing fair and providing "opt outs" (none exists in this instance) correcting you in getting ‘facts straight.’ ”

Dr. Lahm has set up a protest/advocacy Website to organize consumers to fight against abusive credit card practices. I applaud his efforts to call on Congress to force some semblance of fairness in credit card agreements.

Financial services companies are on the brink of collapse and many blame their failures on consumers. From the point-of-view of financial service providers, consumers spent too much, took out loans they could not afford, and were irresponsible in their use of credit. But, now Chase is disclosing that hundreds of thousands of its customers made rational decisions about credit and honored the terms of the agreement. These customers astutely saw that Chase offered them a loan with a favorable interest rate, borrowed the money and kept up payments under the terms of the loan agreement. Aren’t those the kind of informed, rational, financially responsible customers a credit card company desires? Apparently not.

I have a suggestion for Chase and all the other credit providers. Cut the enticements, the teaser rates, the cash back, the bonus points, the coupons, the gift cards, the air miles, the gasoline credits, the weekly bulk mailings, and all the other gimmicks. Offer consumers a credit card with a reasonable rate interest rate (less than 10%), a credit limit commensurate with income and credit history, and terms of use of that are fair to both parties. Events of the past year have demonstrated that the current business model for credit cards benefits no one.

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

Monday, February 16, 2009

Lifetime Promotional Credit Card Rates: Whose lifetime?

The announcement last week from JP Morgan-Chase that some customers would be assessed fees on promotional credit card rates reminded me of a line from former St. Louis Cardinals baseball manager Whitey Herzog. It was back in the mid-1980s when the Cardinals were one of the top teams in baseball and Herzog widely lauded for his managerial skills. Gussie Busch, principal owner of the Cardinals and the Anheuser-Busch brewery offered Herzog a “lifetime appointment” as manager. Herzog’s response to the frail man well into his 80s: “Whose lifetime are we talking about?”

A valid question that looking back over the intervening 25 years was prescient. Gussie Busch died in 1989, Herzog is still alive today but quit managing the Cardinals in 1990, Anheuser-Busch sold the Cardinals in 1996, and in 2008 Anheuser-Busch itself was sold to the European conglomerate InBev.

What does this have to do with credit card fees? In recent years Chase credit card services has offered cash advances at low promotional rates under 5% to its credit card customers that promised the low rate for the “lifetime” of the balance. But, it happens that a “lifetime” for a typical customer is a long time on Wall Street where executives have trouble thinking beyond the end of the current quarter.

Chase now regards as problem customers those who took the bait but not the hook. Hundreds of thousands of customers thought “lifetime” referred to their longevity and have been in no hurry to pay back borrowed funds that accrue low finance charges. Chase never specified what it meant by “lifetime” in its promotional brochure and is now in the process of defining that time period as something considerable less than the numbers found in the actuarial tables for life expectancy.

Last week Chase announced that it would begin charging monthly “fees” to customers carrying balances with low promotional rates. Just how a “fee” differs from a “finance charge” has always been a mystery to me. To me money is money, but for Chase its new flat $10 per month fee is not a finance charge because it doesn’t use the same mathematical formula that it uses to compute finance charges. However, customers who called to complain about the monthly fee were told they could opt out of paying it if they would agree to pay a higher interest rate on the promotional balance.

Chase also changed the minimum monthly payment for these same customers from 2% of the balance to 5% of the balance. That means someone with a $10,000 balance will now need $500 to make the monthly payment instead of $200. Of course failure to make the minimum monthly payment on time results in forfeiture of the promotional rate and a default rate in excess of 25% immediately kicks in.

A spokeswoman for Chase, Stephanie Johnson, explained that the change only affects consumers with low promotional rates who have carried a large balance for more than two years and made little progress paying it off. So Chase’s answer to Whitey Herzog’s question is that “lifetime” means two years. Maybe Chase should only market promotional rates to customers in their late 90s.

A New York-base law firm, Giskan Solotaroff Anderson & Stewart, has brought a class-action lawsuit against Chase for changing the terms of the agreement. The terms of the promotional rate never disclosed that a $10 service fee would be applied after two years. It will be interesting to see how the lawsuit plays out. Most credit card agreements allow banks to unilaterally change the terms for any reason at any time. The agreements also require customers to waive their right to sue and must submit disputes to binding arbitration. I’ve always wondered if agreements with these kinds of provisions meet the legal definition of a contract. Hopefully this lawsuit will test the legality of bait and switch credit card agreements in a court of law.

By the way, JP Morgan Chase received over $25 billion in bailout money from taxpayers last year.

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

Tuesday, February 10, 2009

Peanut Contamination: How Not to Interpret Test Results

The scrutiny of Peanut Corporation of America’s food safety practices is uncovering more problems and forcing closures of more plants. This week a second plant in Texas was forced to shut down.

An infuriating revelation from this fiasco is that Peanut Corporation failed to tell inspectors that samples from its Georgia plant had tested positive for salmonella in 2007 and 2008. The company continued to sell products after having a second set of tests performed by another lab that came back negative.

It makes sense to repeat tests that reveal potentially expensive problems. For example, patients are counseled to seek second opinions before agreeing to expensive and invasive medical procedures. But interpreting secondary tests, particularly ones that conflict with earlier tests, requires care.

Managers of the peanut processing plant are right to conclude that a single positive test doesn’t provide conclusive proof that salmonella is a problem. But, that same reasoning also means that a single negative test doesn’t provide conclusive proof that the product is safe. Tests need to be repeated and more importantly, conflicting results need to be understood. Choosing to believe the test that provides the most convenient result is a recipe for disaster.

Test shopping has led to other expensive high-profile disasters. When the main mirror for the Hubble telescope was manufactured, preliminary tests showed that the mirror did not meet specifications and suffered from an optical flaw known as “spherical aberration.” But much more elaborate and much more expensive tests showed that the mirror had no abnormalities. Managers of the project reasoned that precision and expense must mean results that are more accurate and reliable. Unfortunately this is faulty reasoning. When tests give conflicting results there must be underlying reasons. A test that is designed to be more precise can still be performed improperly.

Rather than seek to understand why the test results conflicted, the mirror was approved for launch. When the first images came back so blurred as to be unusable, astronomers immediately knew the problem—spherical aberration. An expensive optical corrective system had to be designed and a space shuttle launched to install it, before the Hubble could provide usable images.

The lesson is that test results do not make something true. If peanut plant conditions are conducive to the growth of salmonella, the microbes are probably present whether the tests come back positive or negative. Testing cannot be a substitute for actual sanitation.

It’s of course easy for managers to fool themselves with wishful thinking. It’s easy to fool health inspectors and the public with “certified” test results conducted according to “standard” procedures that meet all the legal requirements. But the corporations, government officials, and public, should all be mindful of Richard Feynman’s famous last sentence in a report on an earlier deadly debacle—the space shuttle Challenger disaster. That failure stemmed from the same underlying cause—managers choosing what to believe rather than understand the reasons for the conflicts.

Feynman wrote: “For a successful technology, reality must take precedence over public relations, for nature cannot be fooled.”

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy