Why you should read the fine print of your credit card terms

If you are holding a credit card, you should be aware of its terms and conditions so you can use it responsibly and minimize any risk that could make you financially liable.

I realized I had to write this post after I read a new addition to my Citibank credit card terms and conditions.

Something caught my eye when I recently printed out my statement to pay my bill. A box at the end of my statement caught my attention: “Please be informed that effective immediately, should your credit card exceed the credit limit, Citibank has the discretion to approve any requested credit card transaction depending on your credit standing with the bank.”

Wait a minute! So the bank can approve transactions on my behalf even if that transaction causes me to exceed my card limit?

Seems convenient? Under some situations (like a sudden medical expense or foreign travel) when we need more than the usual credit limit, it may seem so. But medical emergencies don’t happen every day. And we don’t take foreign trips all the time, do we? Remember, all credit card terms apply to us for as long as we continue using the card.

In my case, Citibank’s new terms and conditions made me somewhat uneasy. Here’s what the actual new section says:

“5. DISCRETION (Effective June 2011)

Without giving any reason or notice, and without prejudice to the other provisions hereof, the Bank has the absolute discretion…(b) to approve any proposed Card transaction which may cause the card account to exceed its credit limit;… (d) to increase or decrease the Regular Credit Limit, Combined Credit Limit or Special Installment Limit;…”

Take note. ABSOLUTE DISCRETION.

This gives absolute power over my card to some unknown person/s in the bank tasked to approve credit card transactions. When I brought this up with the bank officer, Gerwin, who I talked to on Citiphone, he told me that they don’t always approve such. That is little comfort to me because what if my card had been stolen? How would the approving officer know if the transaction was initiated by me or the thief? What is the criteria to approve or disapprove a transaction? Someone I don’t know has ABSOLUTE DISCRETION to give that Yes or No. SCARY!!!!!

Did you know that you remain liable for anything charged to the credit card UNTIL you actually report its loss?

Sometimes you don’t immediately notice the loss of the card. It could just be a few hours or even just a few minutes. But syndicates nowadays are very fast. In half an hour, they can actually rack up a huge charge using your lost card (I’ve heard of these horror stories). And when this happens, some banks are known to throw the book at you, meaning, they will read the fine print back to you, insist that you are being held to the terms you ‘agreed’ to, and make you liable for purchases made before you reported the loss.

The other point of absolute discretion that bothered me — to increase or decrease limits. While there is an advantage to this, increases/decreases have to have some basis. For example, if there is a pattern of increasing credit card charges, an increase in limit can be done by the credit card company to accommodate the new buying pattern of cardholder, assuming he is in good standing. But is there any sense to a regular increase in limits when one’s average credit card charges stay almost the same? I ask this because I began with a 5-digit credit card limit, to my recollection, but without a drastic increase in my spending habits, I received several credit limit increases over the years. Was the basis for my increases pegged to inflationary trends then? Doesn’t seem like it.

A few weeks ago, I called Citibank to downgrade my credit limit to just one-fourth of its original amount. Carrying a huge credit limit made me paranoid. To their credit, my limit was lowered. But with this new addition to the terms and conditions, it appears my lower limit does not reduce my credit risk because someone who exercises absolute discretion in the bank can approve any transaction even beyond my credit limit.

Take a look at your own credit limit. Unless you got it when you were a student or recent graduate and you only had maybe a P10,000 or P20,000 limit, you probably now have a credit limit which runs into the hundreds of thousands and far exceeds what you normally spend in a month. And that limit, without your asking for it, gets arbitrarily increased every so often. Maybe it’s a nice status symbol to say one has, for example, a P500,000 credit limit. But think…that is your exposure if you lose your card. And, compounded with an absolute discretion clause, your exposure can even be much greater!

Because of my good credit standing with the bank, what protection do I have in case my card is stolen and used before I can report the loss? If someone in Citibank is going to exercise absolute discretion because I am in good standing, does that mean there is a higher probability that all usage of my card will get approved? Do I bear the burden of unauthorized purchases even if these exceed my limit?

I am not singling Citibank out. I took out my other credit card’s terms and conditions and checked if it had this new clause. I did not find any, as far as I could see. If any of you reading this post find an “Absolute Discretion” clause in your card’s terms and conditions, do let me know and I will update this post.

While I acknowledge that credit card companies have the right to come up with strategies to increase use of their cards while protecting themselves, nothing should be done to unnecessarily increase the credit risk of cardholders by imposing terms and conditions that seem skewed in favor of the credit card company. True, if nothing happens to the card, those terms and conditions will never be called upon. But once you lose the credit card, that fine print that most of us never bother to read can become our nemesis.

Take some time to read your own credit card’s terms and conditions. Be aware of what you are agreeing to by using the card. And better still, unless you absolutely need to use it, leave your card at home and pay in cash.