Saturday, October 28, 2006

Can a Creditor Change the Terms After Closing an Account?

A consumer retail or revolving credit card account is a legally binding contract between the consumer and the issuing card company. When a consumer opens a credit card account, he signs a customer or account agreement that defines the essential and material terms of the contract between the parties. When the card company closes the account, it cannot unilaterally change any of the material terms and conditions of the original agreement.

Elements of a Contract

    With common law three essential elements are required for the formation of a binding legal contract: an offer that unequivocally states the material terms of the agreement, acceptance of the offer as stated and something of value, e.g., interest paid on credit advanced, that is exchanged between the parties.

Card Agreement

    In the case of a credit card account, the card company makes its offer in the card agreement which states all the material terms of the contract: interest rate that will accrue, penalties and other fees as well as the payment schedule. Once the cardholder communicates his acceptance by signing the account agreement, a binding legal contract is formed.

Significance

    The card company cannot later add new conditions or revise any of the original material terms of the agreement without the acceptance of the cardholder. When the card company closes an account, the original terms of the contract still apply. Any additional penalties or fees added by the creditor beyond those permitted pursuant to the terms of the original card agreement are legally unenforceable.

Permissible Changes

    Just because a change is onerous and financially burdensome doesn't necessarily mean that the change wasn't made in accordance with the original terms of the contract. For example, many card agreements allow the creditor to raise the interest rate, with or without notice, in the event the prime rate or some other stipulated interest rate index increases.

Third-Party Purchasers Of Bad Debt

    One of the most common terms contained in credit card agreements is the right of the creditor to assign (sell) the account to a third-party purchaser. It is important to note, however, that the assignee (company who purchases the card account) obtains no greater rights than that of the assignor (credit card company who sells the account). At law, the assignee stands in the shoes of the assignor, which means it cannot impose any additional obligations or terms on the cardholder that were not part of the original card agreement.

Considerations

    Some card companies may send existing cardholders a revised card agreement that changes one or more of the material terms and conditions of the original card agreement. If the cardholder indicates his acceptance of these revised terms by signing the revised card agreement, he is bound by the new or revised terms.

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