Dear Dr. Don,
Some of the highest CD rates are being offered by major credit card banks like Discover and Capital One. My CD and credit card accounts are at the same bank. If I were to lose my job and default on my credit card account, could the bank confiscate my CD to pay the balance?
-- D.B. Banking
Dear D.B.,
There are a lot of variables in play in your scenario. Federal law, state law, the financial institution's charter and the credit agreement all play a role.
Federally chartered banks, for example, can't use the "right of offset" in your deposit account to pay off your credit card but federally or state chartered credit unions can use it. The Truth in Lending Act does allow that the bank may have the right of offset if given that right by the cardholder in authorizing an automatic payment plan.
What's the right of offset? The "Dictionary of Banking Terms and Phrases" on the Office of the Comptroller of the Currency's website defines it as follows: "Banks' legal right to seize funds that a guarantor or debtor may have on deposit to cover a loan in default. It is also known as the right of set-off."
The right of offset is common with secured loans. The outstanding balances on your credit cards are unsecured loans. That's the main reason the average interest rate on a credit card is around 14 percent, while you can get a car loan for 6.87 percent and a home mortgage for 4.66 percent. But, if the credit card provider has the right of offset, you've given it a way to tap assets and that unsecured loan has a financial backstop for the lender.
Credit card providers have always had judicial remedies allowing them to turn to the courts to secure a judgment that, depending on state law, may allow them to attach a bank account or garnish wages. The relevant state law may be the law where the card is issued, not your state of residence.
If a great CD rate (at a bank where you also have a credit card) has you concerned about the card issuer's right of offset, review your credit card agreement (as amended) before putting the money on deposit.
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