Ask An Attorney: Is Chase’s 5/24 Rule Legal?

Introduction

Welcome back for round 2 from Alex & Darr, The Points Attorneys. If you missed our first post, you can find it here. We are lawyers who help points-and-miles enthusiasts bring claims against banks related to the miles-and-points hobby. In these posts, we’re looking forward to answering your questions and providing some general tips to help DoC readers. If you want to add your questions to the list, chime in in the comments of this post. They also have a great series of posts on Frequent Miler called the Fine Print Series that I’d strongly recommend reading.

The following is not legal advice. It is written for educational purposes only. If you have a question or if you believe you have a complaint, submit an inquiry on bachuwalaw.com

The Question

Just curious if there might be any remotely reasonable claim that can be possibly used to argue Chase’s 5/24 policy is unlawful? I know Federal law prohibits discriminating against credit applicants based on a variety of factors, could there be any way to argue that the 5/24 policy is not a reasonable evaluation of an applicant’s creditworthiness and even potentially unlawful? Not really familiar with law stuff so hope I wasn’t being unreasonable or absurd. Would love to see this answered. Thanks!

Darr’s Response

Banks, as private companies, have wide latitude in managing their relationships with customers, including choosing who will be their customer in the first place. The CreditBoards forums are full of information about “easy” banks to get credit versus “hard” banks. And, of course, the dreaded “blacklist” is employed by many banks. Each bank has its own nuances.

Chase has added another twist to credit card application roulette with its 5/24 rule. If an applicant has had 5 or more new accounts opened (regardless of the bank) within the last 24 months, the application is automatically denied. For the deep dive into the 5/24 Rule, I’d encourage you to read this post.

Of course, points-and-mile hobbyists care about the rule because it stops them from harvesting those sweet Chase signup bonuses. But our reader is also more generally curious about whether the rule is lawful. In short, I don’t see anything unlawful about it. As I said at the top of the article, banks have wide latitude in managing their relationships. For example, if you read through the Terms and Conditions that control your bank relationship, you’ll probably see something along the lines of “We reserve the right to close your account at any time.” Banks can set seemingly arbitrary limits and rules when managing banking relationships and opening accounts.

And banks don’t have to advertise their criteria for managing those relationships.  This shouldn’t come as too much of a surprise. If I call up American Express and ask them to commit on the record as to what credit score would yield an instant decline, I’m sure they’d politely refuse. Banks have all sorts of different criteria when they make credit decisions, all filtered through a sophisticated algorithm, that spits out a “yes” or “no.” Chase has made the decision to add another criteria, and nothing about that is unlawful. One could argue that Chase’s 5/24 policy is absurd and isn’t a good way of assessing creditworthiness. But that doesn’t mean there’s anything wrong with it from a legal perspective.

Final Thoughts

Two final thoughts: First, although a bank has broad discretion in opening, maintaining, and closing accounts, the bank must give you the reason why an account was closed or never opened in the first place (this is called “adverse action”). If a bank doesn’t give a reason for adverse action, they are likely breaking the law, and you may have a claim against the bank.

Second, banks cannot act discriminatorily. If a bank has an unpublished rule that it will not issue credit cards for a certain race or ethnicity, that’s illegal. Additionally, if a bank has a policy that is applicable across the board, but results in discriminating against a given group, that too could be unlawful. I’ve tried to think of a way that the 5/24 rule could have the effect of discriminating against a protected group, and I can’t think of a compelling argument (not until points-and-miles enthusiasts become a protected group of people).

If you have any follow-up questions please voice them in the comments. If you’d like to discuss anything privately, you can find us at DarrLawOffices.com or BachuwaLaw.com. Thanks for reading!

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Ken
Ken (@guest_461582)
August 19, 2017 03:04

Is it legal for banks like Wells Fargo to deny credit cards to non-permanent residents or citizens?

kt
kt (@guest_459418)
August 15, 2017 20:59

People with bad credit history are hard to get approved for credit cards. I think the banks are discriminate people with bad credit. Also, cops are putting criminals behind bars. This is also discrimination against criminals. Man, what a society we are living in.

SamSimon
SamSimon (@guest_459372)
August 15, 2017 19:57

“We reserve the right to close your account at any time.” if this is lawful – so anything is lawful )

Darr
Darr (@guest_459484)
August 15, 2017 23:00

You are correct that pretty much anything is lawful. But the motivation for “closing at any time” can’t be due to a protected trait (race, ethnicity, etc). And if/when they close you down, they need to give a reason.

Frankie
Frankie (@guest_459309)
August 15, 2017 18:53

I often come across people in this game who seem to have a cavalier attitude about getting shut down by a bank, even a large one…Consolidation is the name of the game in banking – so why aren’t they more concerned about burning future bridges? Many of these people are in their 20s, ostensibly they’ve got at least 30-50 more years of banking needs ahead – why get your social sec # on the bad list early (or late for that matter)? never need a mortgage? college loan for your kids? credit card for travel…we live in a digital world baby

Abey
Abey (@guest_459268)
August 15, 2017 18:01

How about when a store/restaurant doesnt accept Amex cards or says $10 minimum. Is that legal?

V
V (@guest_459854)
August 16, 2017 16:29

I am not a lawyer but there is no law that says you must accept a certain credit card network. You can choose to accept cash only, or you can choose to accept certain credit cards and not others. At one ponit, the banksters got laws passed (or had terms and conditions) that you could not charge the credit card transaction fee to your customers (e.g. $200 purchase would have a $0.30 fixed transaction fee plus 2%, totaling $4.30). That means that the business has to incorporate the credit card fee into the running cost of the business. That means that the person paying with cash is subsidizing the credit card transaction fees of other customers. Also, I think smaller businesses get a higher transaction fee because bigger companies are able to negotiate transaction fees to a lower rate (I don’t know exact numbers but say 2% for a big store chain vs 2.8% for a small business). Because of all of the above, businesses would rather say that you must have a minimum of $10 purchase for them to absorb the transaction fee into the total, because they cannot charge you a fixed $0.30 transaction fee plus 2% for a $0.50 item. Big businesses probably have a smaller fixed transaction fee or they can afford to absorb the cost of such purchases (like $0.31 transaction cost on selling a $0.50 item).

Looks like now you can charge credit card fees to the customers, although in some states it is still illegal:
https://www.cardfellow.com/checkout-fees-charging-credit-card-fees-to-customers/

Sexy_Kitten7
Sexy_Kitten7 (@guest_463537)
August 23, 2017 02:23

Legal and legal.

Merchants do not have to take every network (just look at Costco) but if they do, they cannot discriminate between product line (Visa Classic vs Visa Signature) or network (can you pay with a Visa instead of an Amex?).

Max min is 10 bucks and must be clearly disclosed.

more than FOUR
more than FOUR (@guest_459233)
August 15, 2017 16:50

Post says: “If an applicant has had more than 5 new accounts…”

“more than 5” means “6 or more.”
The 5/24 rule is “5 or more”.

You’d think a lawyer would get this right the first time.

Darr
Darr (@guest_459483)
August 15, 2017 22:59

mea culpa

I’m a miles-and-points amateur compared to a lot of the folks around here. I hope you’ll forgive my occasional oversights. I was more focused on the legality of the rule than the intricacies. Thanks for reading.

CHASEDAWAY
CHASEDAWAY (@guest_459205)
August 15, 2017 15:56

Screw legal or illegal it’s complete BS! I say we start CHASE PROTEST DAY every year (5/24) will be the date. Not to be confused with 4/20
Who’s with me?!

Culinarykid92
Culinarykid92 (@guest_459141)
August 15, 2017 14:00

Credit, or credit cards are almost a necessity in today’s world, as they determine loans, interest rates, and even potential landlords pull on renters. Seeing as credit cards are extremely hard to get in the first place without taking out a loan or getting a negative attribute with them at first (extremely high interest rates, an AF, account maintenance fees, etc), I got a question.

Is it legal for a lender to refuse an applicant for having no credit history when they apply for and have the money for a secured card deposit (as they are advertised for people trying to build credit)? And as a follow-up, is it legal to deny a card advertised for people with bad or no credit based on no/limited credit history?

As people with no credit history tend to be younger, it may discriminate based on age. And people with bad credit may be people who made bad decisions, but tend to be people who have lower income just using credit to get basic necessities (possibly due to an unforeseen circumstance like job loss).

no
no (@guest_459253)
August 15, 2017 17:38

Nothing illegal in a private business decision to not do business with someone as long as they’re not discriminating against a protected class. The credit reporting and scoring is basically a way to get around any protected class discrimination. They’re not denying because of age, they’re denying because the applicant’s credit isn’t up to their standards.

I don’t think you could be denied for a secured card, because that is kind-of the point and the bank isn’t risking any of their own money.

Culinarykid92
Culinarykid92 (@guest_459269)
August 15, 2017 18:03
  no

My step-brother applied for multiple secured cards with the big banks who issue MC and VS. Everyone denied him for no credit history other than Capital One (which was his last app). They were not done the same day so Capital One could see multiple HPs. So my questions stand. And if they ADVERTISE the card as a no credit/limited history card, and one is denied based on not having a history, there is reason to expect credit history to not be the decision one is denied. After all, wouldn’t that then make the bank liable for false advertisement? I would love to hear the lawyers thoughts on this.

imperium2000
imperium2000 (@guest_459282)
August 15, 2017 18:17

Did your step brother check his credit report? You’ll be surprised that many people who think they don’t have a credit history has one due to a forgotten store card or student loans etc. especially ones with negative information or even completely wrong info.

imperium2000
imperium2000 (@guest_459278)
August 15, 2017 18:12

No credit history definitely is a reason to deny someone an unsecured credit card. They don’t have any information on you to determine if you are credit worthy. Do you expect a bank to give you a car or home loan without any information? They can either pull your credit report or they can do it the old fashion way and demand your pay stubs, bill statements and tax returned.

The scoring systems leave out almost everything related to protected classes. Being young or poor in NOT a protected class. They can most definitely discriminate against you not having any income or have prior bankruptcies.

Being old is a protected class so scoring systems actually give a benefit to young people since they cannot include age of the creditor…but they can use the age of your credit accounts which is not a protected class. Sneaky aren’t they?

Mo
Mo (@guest_459137)
August 15, 2017 13:48

On the flip side of all this, look how many cards Chase allows you to get from them, 5/24 cards or otherwise. You don’t have to many questioning the legality of that abundance. So this negative is tempered by that positive.

jnrfalcon
jnrfalcon (@guest_459132)
August 15, 2017 13:33

Wells Fargo is more discriminatable since they have unpublished rule to refuse any application from people with legal study and working permit but not yet permanent residence. And even if they know, they still prequalify you for their credit cards

Bob
Bob (@guest_459179)
August 15, 2017 14:54

Yes, they just deny you if you don’t have a green card or not a citizen. That is what I call discrimination.