Bootstrapped startup problem: credit card company abuse
25 comments
I found a good website www.BCSAlliance.com. According to this site, jacking up the rate using a bait-and-switch tactic is common in the credit card industry. The only way to refuse the new rate is via a written letter mailed using certified mail. If you were to call and notify the bank that you refused the new rate, the bank will conveniently forget about the oral refusal. This is also said to be a common/usual practice for all kinds of disputes with a credit card company. The following is a sample letter to dispute a change in interest rate from this website:
"Dear Sir or Madam: I recently received notification from you that you are [state change: e.g., changing the way in which you calculate the interest rate on my credit card.] This letter serves as my written notice of my non-acceptance to this change in terms to my credit card agreement. I understand that I have the right to continue to use my credit card under the existing terms until the expiration date on my credit card at which time my account will be closed. I also understand that I may pay off any remaining balance under my current terms."
"Dear Sir or Madam: I recently received notification from you that you are [state change: e.g., changing the way in which you calculate the interest rate on my credit card.] This letter serves as my written notice of my non-acceptance to this change in terms to my credit card agreement. I understand that I have the right to continue to use my credit card under the existing terms until the expiration date on my credit card at which time my account will be closed. I also understand that I may pay off any remaining balance under my current terms."
From what you've described, this ordeal cost you about $248.64 [1]. In terms of the problems that people funding young companies with credit cards often get themselves into, you escaped relatively unscathed.
Rather than looking for avenues of complaint, you may be best served to spend that energy on your startup. As far as business lessons at the school of hard knocks go, $250 is getting off cheap.
[1] (* 27000 (1- (exp (/ (- 1899/10000 799/10000) 12))))
Rather than looking for avenues of complaint, you may be best served to spend that energy on your startup. As far as business lessons at the school of hard knocks go, $250 is getting off cheap.
[1] (* 27000 (1- (exp (/ (- 1899/10000 799/10000) 12))))
His posting here has potentially saved many other people much more than that, though...
Thanks. That was the main reason for posting our experience. In California, it's sad that credit card companies get away with predatory rate hikes and retroactive finance charges when individuals face usury charges for rates over the higher of 10% or 5% + prime:
http://ag.ca.gov/consumers/general/usury.php
I think it's much more damaging to allow massive rate hikes than high static rates. At least with high rates, we know enough to avoid them.
http://ag.ca.gov/consumers/general/usury.php
I think it's much more damaging to allow massive rate hikes than high static rates. At least with high rates, we know enough to avoid them.
Most credit card companies are based out of Delaware because of its absence of aggressive usury laws. With no physical presence in California, California's laws are mostly inapplicable to the relationship between an interstate card issuer and you.
Fundamentally though, anyone who supports free markets and the idea that you are capable of (or at least responsible for) managing you own life better than some state or federal regulator should see usury laws as an unnecessary and unwelcome invasion on the freedom of contract.
When you or I sign up for a credit card, we freely enter into a contract with the issuer that has certain terms, which may include the lender's right to increase the rate of interest at any time. If that term isn't acceptable to us, then there is nothing that forces us to accept the agreement. And no regulator is necessary to prevent the issuer from offering us those terms. We can simply walk away. No one is holding a gun to our head and making us take the credit card.
As as aside: if you think the terms for consumer credit cards are bad, you've never read and signed a merchant agreement! Those are fearsome. ;)
Fundamentally though, anyone who supports free markets and the idea that you are capable of (or at least responsible for) managing you own life better than some state or federal regulator should see usury laws as an unnecessary and unwelcome invasion on the freedom of contract.
When you or I sign up for a credit card, we freely enter into a contract with the issuer that has certain terms, which may include the lender's right to increase the rate of interest at any time. If that term isn't acceptable to us, then there is nothing that forces us to accept the agreement. And no regulator is necessary to prevent the issuer from offering us those terms. We can simply walk away. No one is holding a gun to our head and making us take the credit card.
As as aside: if you think the terms for consumer credit cards are bad, you've never read and signed a merchant agreement! Those are fearsome. ;)
"When you or I sign up for a credit card, we freely enter into a contract with the issuer that has certain terms, which may include the lender's right to increase the rate of interest at any time. If that term isn't acceptable to us, then there is nothing that forces us to accept the agreement."
People have to rely on reputation more than the actual terms, because the terms are nearly meaningless. If the card company chooses to violate the terms, it's not going to be worth your while to fight, as you note several posts above. In practice, this means they can get away with such things until it becomes common knowledge and people stop using them. Advertising duplicity is the only real check on such practices we have.
People have to rely on reputation more than the actual terms, because the terms are nearly meaningless. If the card company chooses to violate the terms, it's not going to be worth your while to fight, as you note several posts above. In practice, this means they can get away with such things until it becomes common knowledge and people stop using them. Advertising duplicity is the only real check on such practices we have.
You are correct that individually it often doesn't make financial sense to litigate and attempt to recoup small loses, even if due to outright fraud (that is, 'violating the terms'). But often enough outright fraud will come back on the wrong-doer not just with lost customers, revenue, and reputation, but also with a devastating class action.
My larger point here is that outright fraud is relatively uncommon. In most cases of alleged 'predatory' business practices (such as the original post), the company is acting well within the clearly stated policies that the customer accepted in advance.
I hasten to add that having the right to do a thing does not necessarily make exercising that right wise or prudent.
Ikea, for example, would clearly be well within their rights to charge more for umbrellas on rainy days than on dry ones. But in fact, they do just the opposite - they charge substantially _less_ for umbrellas on rainy days. That endears them to their customers.
Similarly, I have a friend who loves Capital One. He fell behind on payments to all of his credit cards, and whereas some creditors had phone banks in India calling his house 11 times a day, Capital One was apparently quite civil. They made a polite courtesy phone call, then basically left him alone. Each of his statements contained a polite letter that offered to reactivate his card if he could make a minimum payment. And they did _not_ jack up his interest rate, even though they had every right to do so.
Morality (as opposed to law) is about more than not infringing on the rights of others. And virtuous action that is imposed by force ceases to be virtuous, as it is not freely chosen. Corporations don't exist in any meaningful sense - only the individuals that invest in and run them do. So these truths of ethics are as applicable for companies as for individuals.
Free of regulation, markets will choose the firms that provide the highest value to customers. Virtue and honesty are components of that value - though customers are free to weigh those against their other desires, such as a lower price. And in the age of the Internet, no company can hide duplicity for very long.
All too often, regulation provides incumbents protection against the upstart competitors and tort liability that make free markets work.
My larger point here is that outright fraud is relatively uncommon. In most cases of alleged 'predatory' business practices (such as the original post), the company is acting well within the clearly stated policies that the customer accepted in advance.
I hasten to add that having the right to do a thing does not necessarily make exercising that right wise or prudent.
Ikea, for example, would clearly be well within their rights to charge more for umbrellas on rainy days than on dry ones. But in fact, they do just the opposite - they charge substantially _less_ for umbrellas on rainy days. That endears them to their customers.
Similarly, I have a friend who loves Capital One. He fell behind on payments to all of his credit cards, and whereas some creditors had phone banks in India calling his house 11 times a day, Capital One was apparently quite civil. They made a polite courtesy phone call, then basically left him alone. Each of his statements contained a polite letter that offered to reactivate his card if he could make a minimum payment. And they did _not_ jack up his interest rate, even though they had every right to do so.
Morality (as opposed to law) is about more than not infringing on the rights of others. And virtuous action that is imposed by force ceases to be virtuous, as it is not freely chosen. Corporations don't exist in any meaningful sense - only the individuals that invest in and run them do. So these truths of ethics are as applicable for companies as for individuals.
Free of regulation, markets will choose the firms that provide the highest value to customers. Virtue and honesty are components of that value - though customers are free to weigh those against their other desires, such as a lower price. And in the age of the Internet, no company can hide duplicity for very long.
All too often, regulation provides incumbents protection against the upstart competitors and tort liability that make free markets work.
I believe in freedom of contract, but I also believe in fair business practices. Credit card companies have a lot of incentive to craft agreements that look OK on the surface but are littered with land mines. They are the ones that craft the (not) clearly stated policies, and I suspect they've tuned the agreements to maximize profits from slip-ups and timing.
Case in point: sending APR change notices, setting effective APR change dates, and requiring written responses all within one billing cycle. It's not obvious that a line in the original agreement leads to retroactive billing at arbitrary APR if a written response wasn't received. The written response requirement was only mentioned in small print at the end of a large amended agreement.
You said "Free of regulation, markets will choose the firms that provide the highest value to customers."
That may be true of efficient markets, but I don't think there's nearly enough transparency in the credit card market.
I'm for regulations that prevents excessive interest rate hikes for no cause coupled with insufficient grace periods to reject the rates and close out the account.
We had used the cash advance to bypass a liquidity issue with other assets, so when sufficiently motivated, we were able to payoff the sizable advance within two weeks after talking with Advanta reps. Even then, we were hit with these elevated charges. Lesson learned.
Case in point: sending APR change notices, setting effective APR change dates, and requiring written responses all within one billing cycle. It's not obvious that a line in the original agreement leads to retroactive billing at arbitrary APR if a written response wasn't received. The written response requirement was only mentioned in small print at the end of a large amended agreement.
You said "Free of regulation, markets will choose the firms that provide the highest value to customers."
That may be true of efficient markets, but I don't think there's nearly enough transparency in the credit card market.
I'm for regulations that prevents excessive interest rate hikes for no cause coupled with insufficient grace periods to reject the rates and close out the account.
We had used the cash advance to bypass a liquidity issue with other assets, so when sufficiently motivated, we were able to payoff the sizable advance within two weeks after talking with Advanta reps. Even then, we were hit with these elevated charges. Lesson learned.
A lot of credit card issuers are now including arbitration clauses in their contracts with the borrowers, so that any claim made against the issuer can't be turned into a class-action suit.
Certainly. By 'avenues of complaint,' I was referring to the FDIC and other regulators he was seeking out, not to the Hacker News post, which clearly has relevance and value to others.
The heart of my suggestion was that while it is easy to pour a lot of negative energy into fighting 'their unethical business practices' that 'fleece consumers,' it is more profitable (not to mention ultimately more satisfying) to keep one's focus squarely on creating value.
The heart of my suggestion was that while it is easy to pour a lot of negative energy into fighting 'their unethical business practices' that 'fleece consumers,' it is more profitable (not to mention ultimately more satisfying) to keep one's focus squarely on creating value.
You're right. We won't waste much more time unless there's some sort of class action lawsuit that is real profitable (and consequently, highly satisfying) :-)
Seriously guys, I know becoming a successful entrepreneur requires taking some risks, but for Pete's sake, stay away from funding your aspirations with credit card debt. If it hits the fan, your credit rating could become ruined forever. Not to mention you could easily crater into bankruptcy, which is a predicament that not only has financial and legal implications, but social and emotional ones as well.
Fund your start up with equity, not debt. Either your own, or somebody else's.
Too many lives are ruined with credit card burdens...
Fund your start up with equity, not debt. Either your own, or somebody else's.
Too many lives are ruined with credit card burdens...
I agree that you shouldn't put much if anything at all on credit cards. Ever.
But, even if you do run into trouble, a negative hit on your credit rating only lasts 7 years. Even bankruptcy falls off your credit rating after 7 years. It's just a lot harder to file for bankruptcy these days, because of the laws that the credit card companies pushed through congress. It's actually one of the reasons for the sub-prime mess were in, but that's another thread.
But, even if you do run into trouble, a negative hit on your credit rating only lasts 7 years. Even bankruptcy falls off your credit rating after 7 years. It's just a lot harder to file for bankruptcy these days, because of the laws that the credit card companies pushed through congress. It's actually one of the reasons for the sub-prime mess were in, but that's another thread.
I have to agree with Parker. I appreciate there may be needs for credit, so this isn't directed at DocSavage specifically, but in general if you can't find equity and need to cash advance a credit card then either your idea won't sell or you can't sell it.
Neither of those is a good omen for an ROI above the 18.99% you might be fleeced!
Neither of those is a good omen for an ROI above the 18.99% you might be fleeced!
Nothing a credit card company does is ever in your favor unless it's required by legislation.
While they make money on a per transaction basis, the bulk of their profits come from fees and interest. Especially fees since that's essentially "free money" for them. So they really don't like anyone who pays off bills in full each month (transactors aka "deadbeats").
Also, take a close look at your credit offers and statements. Cash advances are almost always at a higher interest rate and don't have a grace period like purchases. Odds are you still would have been accessed the finance charges even under the original lending agreement.
While they make money on a per transaction basis, the bulk of their profits come from fees and interest. Especially fees since that's essentially "free money" for them. So they really don't like anyone who pays off bills in full each month (transactors aka "deadbeats").
Also, take a close look at your credit offers and statements. Cash advances are almost always at a higher interest rate and don't have a grace period like purchases. Odds are you still would have been accessed the finance charges even under the original lending agreement.
Yikes. I just signed up for an Advanta business credit card last week, and received my notice that I was approved. I'm not planning to take out any cash advances using the card. Has anyone else had good/bad experience with this company?
I just watched this last week: http://www.pbs.org/wgbh/pages/frontline/shows/credit/
What you're referring to as a "predatory practice". Is par for the course. It's what credit card companies do, it's not limited to your company.
What you're referring to as a "predatory practice". Is par for the course. It's what credit card companies do, it's not limited to your company.
Thanks very much for the link to the documentary. It shows what a monster this industry has become due to deregulation and lack of oversight. Reminds me of Enron when they found loopholes and toyed with California energy prices. Like minting money.
Don't fund with credit cards unless you absolutely have to. The interest rates on those are often too high for any legitimate business to make enough to sustain payments once the "teaser" rate is gone.
> Don't fund with credit cards unless you absolutely have to.
Funding with personal debt should not be considered 'bootstrapping', if only because it's so damn stupid, and should not have a positively-connoted word associated with it.
It's more like buying ownership in your own company with money you don't have.
Would you borrow money to buy stock in someone else's company?
Would you borrow thousands of dollars to gamble in a game that has about a 1/10 chance of winning?
Funding with personal debt should not be considered 'bootstrapping', if only because it's so damn stupid, and should not have a positively-connoted word associated with it.
It's more like buying ownership in your own company with money you don't have.
Would you borrow money to buy stock in someone else's company?
Would you borrow thousands of dollars to gamble in a game that has about a 1/10 chance of winning?
I recently got a "splatter-gram" email from a friend of my father, also slamming Advanta. Sorry, but I'm smelling a pattern here, and it makes me skeptical that something is going on targeting Advanta. It's likely what they're doing is legal and quite common, even it doesn't make people happy.
Further, using any type of "rewards" card hammers the retailers. The "reward" comes out of the transaction, as do transaction fees. The end result is higher prices to cover the rewards. Your reward isn't the result of generosity, it comes out of your own wallet ultimately.
Further, using any type of "rewards" card hammers the retailers. The "reward" comes out of the transaction, as do transaction fees. The end result is higher prices to cover the rewards. Your reward isn't the result of generosity, it comes out of your own wallet ultimately.
I've actually had very good experience overall with American Express. I highly recommend using their corporate cards for important purchases where you might want to extend your warranty. I've saved thousands of dollars thanks to that program alone. They also issue cash back rebates to your account every February.
Of course, this is all provided that you always pay off your balance on-time.
Of course, this is all provided that you always pay off your balance on-time.
I've seen similar "Cash Back Rewards" tactics on a card I have and pay balance in full each month. Also. Cashing said checks sign up up for a yearly program (that does something? I never read what) that tacks on a new fee to your account.
Needless to say, I don't use this card unless I get the "we don't take Discover".
Needless to say, I don't use this card unless I get the "we don't take Discover".
Moral of the story: If it sounds too good to be true, it probably is.
The borrower is slave to the lender. I hate credit cards.
Advanta (http://advanta.com) advertises a business card with "0% Fixed APR on balance transfers for 15 months with a 7.99% fixed APR therafter." I thought I saw this card positively reviewed in one of the entrepreneurial magazines. We signed up and for about 9 months, we made some charges and paid the balance in full each month. Then we decided to take out $25k in cash advance from the account with a reasonable transaction fee capped at $50. A few months after taking that cash advance, we were notified, in the words of a customer service rep, of "a slight change to our lending guidelines since your account was established." That slight change was an increase from 7.99% to 18.99%.
The notification letter was dated Feb 29, 2008 (date of letter, not receipt) and the new rate was effective March 20, 2008. The March 20 change was conveniently 5 days before the end of the billing cycle so that Advanta could take advantage of their billing clause that "any change in APR becomes effective as of the first day in the billing cycle.." So both the notification and rate increase happened within a single billing cycle.
Note that this increase in interest was NOT tied to any late payment. In an e-mail, a customer service rep wrote that the change occured because "Advanta reviews lending guidelines on a regular basis to ensure that they are in line with industry standards and the changing economy." Except they are still advertising the 7.99% rate on their website and mailings. Who do they think they're kidding?
After receiving the letter and corresponding with Advanta, I paid the $27k balance in full two days before the March 20 rate change and even had a negative $200 due because of a LogoWorks rebate. But because I did not send a signed written notice that I rejected the modified account terms, Advanta billed me 18.99% finance charges for the previous month on the cash balance.
We can only imagine how many people they rip off this way. It seems clear to us, they've automated this way of doing business to fleece people who don't rapidly and precisely respond to their unethical business practices.
Other ways they gain profits: "Cash Back Rewards" that aren't credited to your account but sent as cutout checks in sheets of paper behind regular account statements. They realize people, particular ones with online accounts and software, may not open or even notice the checks. So these "void within 90 days" checks will go unused. The envelopes containing these checks won't have any unusual markings and just say "Statement Enclosed." But envelopes that have cash advance checks and other ways to get you in debt have "Inside: Important Information About Your Account" on the envelope. Do you see a pattern here?
In looking at some card review sites, it appears we aren't the only ones getting the jump in interest for no reason. We contacted the FDIC and spoke with the Advanta specialist. It seems as long as they are following the business agreement they wrote (to fleece consumers, I believe), then the FDIC can't do anything.