Reject Variable Terms and Conditions

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Ordinary business transactions used to be governed by long-standing laws and customs that had been developed to make them fair to both sides. Over the last fifty years or so--basically, since credit cards became popular--those rules have been gradually pushed aside. Now, everything is governed by "terms and conditions" that the corporate party can change at any time. Do your best to avoid doing business on such terms.

Once in the 1970s and once in the 1980s, I "took out a loan" (as opposed to using a revolving credit agreement such as a credit card). In both cases, I borrowed money at a specific interest rate and had a fixed repayment schedule--which could not be changed by the bank, as long as I made the payments on time.

You can still borrow money that way, but most credit transactions are different now: they're done according to "terms and conditions" that let the banks change anything they want. (The new credit card law limits banks' ability to raise rates, but variable rates can still go up if the index goes up, and for most credit cards the index is the prime rate--which is a rate that is set by the banks themselves.)

What person in their right mind would agree to borrow money on terms that the lender can change at any time? Banks are corporations whose sole motivation is to maximize profits: They will always change the terms and conditions so as to suck the maximum amount of money out of their customers. It's what corporations do.

The only real limit on banks' terms and condition comes from competition. Although they make most of their money from their worst customers, the banks also make a tidy sum when people like me use credit cards for transactions, because the banks earn a fee on every transaction. A bank that changes its terms in ways that pinch those people (people like me) can lose profitable business--because people like me have other options. (I think the recent financial crisis has also reminded banks of the value of borrowers who actually pay back the money that's been lent to them.)

Competition has generally worked to help everybody, because institutions have historically had only one or a few broadly applicable sets of terms and conditions, each of which applied to a large numbers of customers. But institutions only did that because it was convenient for them. Now that the technology will support it, I expect that businesses will start to move toward individual terms and conditions.

Much the same way the airlines moved to having a different price for every seat on a plane, I expect that other businesses--eventually, all other businesses--will start to do the same. They'll try to lock you into their service, and then jack up the rates to whatever will suck the most money out of you.

It can get much worse, though--and I think it will.

Suppose a business wants to raise prices, but identifies you as a customer who will probably drop the service rather than pay more. Instead of raising its fee by just a few dollars, it raises its fee by tens or hundreds dollars, hoping that you'll fail to cancel before the new fee goes into effect. Sure it loses your business, but it would have lost that anyway. If you've agreed to terms and conditions that the business can change at any time, this is probably perfectly legal.

Business don't do this much, but just for practical reasons--they worry about bad publicity, they're doubtful that they'll be able to collect on that unconscionable last charge, they'd hate to lose a customer if they've guessed wrong about the maximum you'd be willing to pay, and because it's been difficult to manage unique terms for every customer. Technology means the last restriction no longer applies, and makes all the others weaker than they used to be.

You can't completely avoid variable terms. Many services are unavailable on fixed terms. But avoid them when you can--and always go into such a deal with your eyes open. Think:

• What could the service provider change that would cost you the most money?
   
• Can changes in terms affect you, even if you cancel immediately? (And if not, is the only reason they can't because of a provision in the terms of service that they could change?)
   
• If you react as quickly as possible to a disadvantageous change, what's your worst-case loss?
   
• How much time and effort will it take to track things closely enough that you can react in a timely fashion?
   
• How much would it disrupt your life if you had to abruptly cancel a service whose terms and conditions became unacceptable?
   
• Is there a better option--one that might cost a little more, but that would let you avoid a future disruption?

If you've agreed to terms and conditions that the business can change at any time, and you don't expect pretty much every business to change them to screw you in whatever way will be most profitable to them, then I think you simply don't understand what corporations are.

[Updated 21 September 2009:  This post was featured in the 17th edition of the Best of Money Carnival.]

[Updated 5 October 2009:  This post was featured in the The Best of the Best in Money and Personal Finance.]