Apparently your Comenity credit card balance is a secured loan

This is something I hadn’t heard of before: apparently Comenity includes in its T&C’s the right to come take anything you bought with your credit card if you don’t pay your bills. Via the Los Angeles Times:

About halfway through the pages of legalese, after the usual boilerplate about Comenity being able to change the terms of the contract any time it pleases, so there, Maizlish found this:

“You grant us a security interest in all goods you purchase through the use of the account, now or at any time in the future and in all … proceeds of such goods.”

That’s a fancy way of saying that Comenity reserves the right to send guys to your home and take any stuff you’ve purchased with your card if you don’t pay your bills.

That’s interesting because aside from the awful secured products for credit repair, credit card lending is generally thought of as unsecured debt. With a mortgage, the bank can come take your house if you don’t pay them back, but no such recourse is available for a credit card debt.

I checked out the T&Cs for myself on the Pottery Barn credit card. The security interest provision also says:

We waive any security interest we may have in your principal dwelling, to the extent that it would otherwise secure any obligation arising hereunder.

So I guess that means that if you spend the money on upgrading your house, Comenity waives their right to come after you. Did I just discover a loophole that Million Mile Secrets is going to kill? I also noticed something else in the T&Cs that I wasn’t previously aware of, which is that you’re on the hook for costs incurred in collecting your debt:

You agree to pay our reasonable costs for collecting amounts due, including reasonable attorneys’ fees and court costs incurred by us or another person or entity…

Debt collection has fortunately never been an issue for me, so this has never been on my radar, but I didn’t know that being held responsible for attorneys’ fees and court costs involved with settling a debt was a thing when it came to consumer credit cards.

Apparently secured credit cards used to be more common. The LA Times article continues:

This kind of thing fell out of favor among many card issuers in the 1990s, after Sears paid $273 million in refunds to customers to settle charges that it used a security interest provision to unfairly muscle people into making payments.

Comenity, however, has stuck with the practice. The company is a leading issuer of store cards, including for retailers Ann Taylor, J. Crew and Pottery Barn.

“I’ve never heard of anything actually being repossessed,” said Linda Sherry, director of national priorities for the advocacy group Consumer Action. “But these cards make it clear they can do it if they want.”

It’s interesting that Comenity would leave the language in there if it doesn’t actually act to repossess anything. According to the article, it’s done to give it a leg up in bankruptcy proceedings:

During bankruptcy proceedings, consumers are asked if they want to “reaffirm” their secured debt. In other words, will they commit to keep paying off their car or home loan so they won’t lose the property?

“Credit cards with security interest provisions are a way for these lenders to get on the list of reaffirmed loans,” said Chi Chi Wu, a staff attorney at the National Consumer Law Center. “Reaffirm our debt or lose your TV. It’s a way to scare you into staying on the hook.”

That’s not to say these are idle threats. While the chances of a store or bank trying to repossess an electronic device or appliance seem low, it can happen. So don’t just dismiss any such warnings as bluffs.

Fascinating stuff if you’re a credit card geek! The full article is here.