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


Anonymous said...

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.

Anonymous said...

The person who works for Chase needs to find honest work.

The fact is, Chase did NOT offer ANY form of opt-out, and this "change in terms" is basically a unilateral attempt at legalized extortion. If they gave 45 dyas 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."

Also, worth noting, Chase itself calls the new "fee" a finance charge.

More info here:

There are NINE class-action lawsuits filed on this already, and more coming. See the links above for more on that as well (home page, lower-left).

Dr Robert Lahm said...

The comment from the Chase employee on your post is a huge disservice to you, as Chase has perpetrated one of the most despicable acts in the history of credit cards. 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."

That so-called fee is in fact, "a finance charge," as per the actual change in terms notice, despite Chase's constant media spin trying to call it a fee or a service charge -- this is certainly a case that could be a poster child for "deceptive marketing strategies." That's the reason for the 10 class action lawsuits to date -- yes the number is growing. Bait and switch, fraud, violation of TILA (Truth in Lending Act) provisions, all are among the allegations that I think a "jury trial demanded" venue would absolutely prove beyond a reasonable doubt.

Since you are an academic, and so am I, you may enjoy knowing that this will be another kind of case beyond any court proceeding when I am done, as in "textbook case study" on what happens when a company is too bold in its willingness to abuse consumers. Future generations in college classes across the nation, will learn what not to do, from this.