Saturday, January 01, 2005

Do You Really Know What's In Your Wallet?

Mike Hatch, Minnesota's Attorney General, has filed a lawsuit against Capital One alleging deceptive advertising. The advertising is misleading because a low rate is advertised, yet that rate could significantly increase.
Minnesota Attorney General Mike Hatch filed a lawsuit today against Capital One Bank and Capital One F.S.B. for using false, deceptive and misleading television advertisements, direct-mail solicitations, and customer service telephone scripts to market credit cards with allegedly “low” and “fixed” interest rates that, unlike its competitors' rates, will never increase. In fact, the lawsuit alleges that Capital One increases the interest rate on such cards up to 400% for consumers who trigger a “penalty” rate by defaulting in any number of ways.
(Editor's Note: State Attorneys General are (usually) statewide elected officials.)

All lenders, including Capital One, are required to adhere to Regulation Z (Truth in Lending). Often times, this disclosure comes in the form of a folded piece of paper with extremely tiny print. By law, lenders are required to disclosure the terms and conditions of the loan, including situations where the interest rate would increase.

The complaint reads like a 'bait and switch' scam: bait them in with a great offer and switch the deal on them. The mechanisms by which Capital One can raise rates are referred to as 'penalty pricing' or 'trip-wire pricing' in the complaint. Examples of what triggers the penalty pricing are late payments or being over limit on a Capital One card.

The complaint also cites the ability of Capital One to unilaterally change the terms of the agreement at any time, including interest rates with limited notice to the cardholder.

The evidence cited in the complaint does not appear to be completely egregious. In one instance, the rate was increased on the cardholder and she simply closed her account. In another, the cardholder made a payment two days late and his rate was increased. However, the press release asks those who think they have been victimized to call the Attorney General's office.

Two questions come to mind for me:
  1. Do prospective cardholders read the disclosure statements and understand them prior to using the card?
  2. Should the cardholder be penalized for not adhering to the terms and conditions of the card, specifically for late payments or going over the credit limit?
Let's ask ourselves another question: will Capital One be a profitable company with a portfolio of credit card loans yielding just 5%? I don't think so.

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