We’ve all been told that credit cards are necessary to build your credit to improve your credit score. You’ve heard the story. You open a credit card, stay well below your credit limit, make payments on time and keep it as long as possible. You do it to prove you are responsible, that you can be trusted, and to see that credit score creep up as your debt-to-credit available ratio improves.
It’s a great plan if you want to buy a home, right? You want to get the best rate and terms. You would like to get pre-approved for the largest amount possible, so you have choices when you shop. It’s great to have the freedom to pick the best neighborhood, the best schools, and the most convenient commute to work.
But did you know that your credit card could cost you that home? How could that be? Most of us understand that the majority of credit cards are non-secured debt, unless you messed up your credit somewhere along the lines and are forced to get a pre-paid credit card or a credit card secured by a deposit.
Enter sneaky little trick that credit card companies are deploying.
I am one of those geeks who reads the user agreements. Research and information are like candy to me. It’s not that I love reading the agreements – I loathe it! But I have a total curiosity and desire to know what these companies are getting us all on the hook for. I will admit that I don’t take the time to read every word in every contract, but I do scan each document for critical or red flag information. If I find something crazy or messed-up, I read it in detail. And today, I found something pretty scary.
A company with whom we have a mortgage with, and also a credit card with, sent us an “update” that basically allows them to secure our credit card debt with OUR OWN HOME. Now the credit card is nothing special, we just use it to make purchases in places we don’t want to use a debit card and pay the balance in full each month. No biggie, until now.
While we are very much disciplined with our credit card, it is pretty easy for that type of information to get stolen and used fraudulently. I know, I know, the credit card companies have policies in place that “protect” users from fraud, but it is not 100% guaranteed! And, if the circumstances are just right, it is easy to fall into the “not protected” class. It all depends on their policy and HOW THEY INTERPRET IT IN YOUR CASE.
How likely is your credit card to be used fraudulently? Very likely. It happens a lot. One of my relatives thought she was protected better since she didn’t use her credit card online, but has had it compromised at least twice during a year’s time. After asking the credit card company how it was used fraudulently, they told her scammers were simply “guessing” the number.
With the recent massive data breach at Equifax, our information is even less secure and the chances of fraud are even higher.
Nothing is 100% fraud proof and anyone telling you that it is happens to be a fool or a liar. The bottom line is credit cards are easy targets for criminals and you are not 100% guaranteed that you won’t be held responsible if something goes wrong.
As scary as this is, at least you had the peace of mind knowing that credit card debt is unsecured and THE WORST that could happen would be a mark on your credit report because you simply refuse to pay fraudulent charges.
Now, without you even signing for it, under certain circumstances, your credit card company can claim your assets as collateral to secure your unsecured credit card. You may not even notice they have.
When you sign debt documents, guess what? You are SLAVE TO THE LENDER.
When you open a credit card for convenience and/or to “build up” an arbitrary number with a credit bureaus that can’t even keep your information accurate or private, you are opening yourself up to SLAVE STATUS.
Now, I’m sure some of you are not willing to give up your credit cards because how else will you shop online or build your credit? I get it. I am not advocating completely giving up credit cards. But there are some things you can do to minimize your risk and take back control of your finances.
- Do not open or use credit cards with companies that you have any mortgages with. It’s too tempting for them to sneak language into updated agreements that give them the power to use your real property as collateral for what was supposed to be unsecured debt. And by the way, one of the reasons credit card companies get to charge higher interest rates on credit cards is the fact that unsecured debt is more risky for them. Finance 101 basic rule: Higher risk should mean higher potential payout.
- Don’t open credit cards with institutions where you have any type of substantial asset account (savings, IRA, money market account, checking with direct deposit, etc.) Just because their policy won’t allow them to take from those accounts today to cover an unsecured credit card, doesn’t mean it won’t change tomorrow.
- Read your user agreements. I know it’s a headache, but I promise you it will be worth it. Use a highlighter. Get rid of any cards with agreements that choke the daylights out of you and take away all your rights. You will be surprised and nauseated when you see what they demand. It’s also a great way to spot companies that are more customer-oriented.
- Monitor all your accounts regularly and report suspicious activity immediately. It is also important to file a police report for further proof and to minimize losses.
Now, if you are finding that you are overwhelmed with user agreements, maybe that’s an indication that you should cut back on the number of credit cards you have. Stick with one or two: one for personal and one for business. Then give the rest the old choppity-chop! (Don’t forget to close the account by calling the company, too.)
You may be thinking, “Gee, my credit card company doesn’t require collateral in my agreement, so I don’t need to worry.” That is good that they don’t, but watch out! Even if it’s not common at the moment, these companies tend to follow trends, especially when it offers them more protection and proves to be profitable.
It’s not my goal here to twist your arm and get you to read your user agreements. My goal is simply to give you something to think about. Just as the saying goes, “Never mix business with pleasure,” I am telling you this: “Never mix unsecured debt with assets.” Don’t let them touch each other, don’t let them be in the same room together, lest they breed and all of your unsecured debt become secured.
I will leave you with a quote I heard years ago from one of my favorite accounting instructors:
“We live in an era of legalized theft.”
That is theft by contract.
It is my hope that you become more aware of the ways that other people are willing to put you at risk and mitigate that in some way, shape or form. Being debt-free is one of the best gifts you can give you and your family. There is no such thing as good debt, in my opinion. When you minimize or pay off all of your debt, you instantly give yourself more power. You are not owned by anyone!
Disclaimer: Jaimie is not the great and powerful Wizard of Oz, a lawyer, a doctor, a veterinarian, or a CPA. Nothing your read in my blog is a substitute for professional advice and doing your own good research. Remember that just because someone has credentials doesn’t guarantee their advice is golden or perfect. Put your smart hat on and do your due diligence. Good luck!