Does your card contain a security interest clause? If you are like most consumers, you have no idea because you signed the card agreement without wading through the mind-numbing legalese, just like the rest of us.
However, it is in your best interests to take a few moments to look for this language — because it allows the card company to repossess items that you have paid for with your credit card if you do not pay your bills.
In financial terms, a security interest is a legal claim on some form of collateral that has been pledged, generally against a loan. Your mortgage is called a secured debt, because your home serves as a security interest to the bank — if you fail to pay, your home may eventually be repossessed. Credit cards are typically unsecured, meaning repossession is not a method of recourse for card companies against unpaid card bills (although lawsuits and settlements are). However, if a security interest clause is in the paperwork you signed, the credit card company has the right to repossess if they choose to do so.
Here are a few examples of such language:
- "You grant us a security interest in all goods you purchase through the use of the account..."
- "If we take back any good, we may charge you our costs and require you to make the goods available at a convenient place of our choice as allowed by law."
Look for language that uses the phrase "security interest" as the first example does, or that implies purchased goods may be taken by the card company like the second example.
The practice applies to both store and all-purpose credit cards. For example, Comenity Bank, a supplier of cards to well-known chains, such as J. Crew, Pottery Barn, and Ann Taylor, is known to place security interest clauses in some of their cards.
The card companies look at a security interest clause as a means of reducing their risk. Unsecured debt generally has a higher interest rate because of the greater risk involved. In the case of bankruptcy, unsecured debt is typically wiped out — but a security interest clause allows the card issuer to have the consumer reaffirm their debt (to keep their items) or refuse to do so and allow for repossession.
It is possible that in exchange for lowered rates or promotional deals on certain cards that a security clause in the background mitigates some of the risk and allows companies the risk latitude to offer these deals. There is nothing wrong with that arrangement, and you as the consumer may be willing to accept those terms and make sure not to charge more than you can pay for.
Card companies have no real interest in repossessing your credit card purchases; they just want you to pay your bills on time. For the most part, a security interest clause is a threat that card companies can use to convince delinquent customers to pay up. However, if your card has such language and a big-ticket credit card purchase is in large-scale delinquency, the company could decide to follow through on repossession. That may not be a risk you want to take.
Check the terms and conditions on your credit cards for security interest language. If you find it, it is up to you to decide whether you want to switch or whether you are satisfied enough with your card that you are willing to accept those terms. Remember, the presence of a security clause is irrelevant as long as your bills are paid on time.
If you want more credit, check out MoneyTips' list of credit card offers.