Preface | User's Guide | Table of Contents | Print Sourcebook
Credit cards are the most common form of "open ended" or revolving credit. Most people have at least one credit card, and often many more than one. Credit cards are issued by banks and retailers. "Bank" cards, such as VISA, MasterCard or Discover Card, can be used at a wide number of retailers. Retail store cards are used only at the business issuing the card, such as Macy's, Sears, or Exxon. Travel and entertainment cards, such as American Express or Diner's Club, were originally meant to help business travelers by allowing them to charge their travel expenses. These cards typically require payment in full upon receipt of the bill. Both bank cards and retail cards allow you to make partial payments on your outstanding balance.
Federal law provides some protection for the consumer by limiting liability for unauthorized charges. Credit cards do get lost or stolen so the limited liability can be a great benefit to consumers.
The Truth-in-Lending Act (TILA), a federal law, has several special rules governing credit card transactions. These special rules fall into three categories: initial disclosures, periodic disclosures, and rules concerning disputed charges.
Credit cards offer a continuous form of credit, therefore when one applies for a credit card some special pieces of information must be clearly described:
- The conditions under which a finance charge (including interest and late fees) may be imposed on the consumer's account, including the extent of any "grace period" before finance charges accrue
- The method by which the creditor will determine the balance on which a finance charge is imposed
- The method of determining the amount of any finance charge, including interest, late fees and any minimum or fixed charge
- The periodic rate of interest (such as 11/2% per month)
- The so-called nominal Annual Percentage Rate (APR), which is computed by multiplying the periodic interest rate by the number of periods in a year to arrive at an annual rate
- Disclosure of whether the agreement gives the creditor a security interest in any merchandise purchased with the credit card (or any other property)
- A statement of the consumer's right to dispute charges (this statement must also be provided every six months).
Example: Bobbie Cardholder's Vista Account contract discloses that she must pay her account bill within 25 days of the billing date and that the interest rate on the unpaid balance is 1 1/2% per month. Bobbie's periodic rate, then, is 1 1/2% and her APR is 18% (1 1/2% x 12 months).
Example: The same rule applies to other transactions, like home equity lines of credit, which may be payable at longer intervals than credit card accounts. Thus, if Bobbie got a letter in the mail from Vigilant Mortgage Company proposing a home equity line of credit with payments every three months at a periodic rate of 9%, she might think she was getting a good deal. In fact, the APR on this loan is 36% (9% x 4 periods), which is practically an invitation to lose her home.
Many of the same disclosure rules that apply to revolving, open-ended credit transactions also apply to closed-ended credit transactions, such as installment contracts. Refer to Credit: Loans and Financial Services for more information on closed-ended credit transactions.
Credit card issuers also must provide consumers with statements at the end of each billing period which include the following additional disclosures (these should be familiar to you from your monthly credit card bills):
- The date of the bill and the beginning date of the billing cycle
- The outstanding balance owed at the beginning of the billing cycle
- The date and amount of each extension of credit during the billing cycle, with a description of the transaction sufficient to identify it
- Any credits to the account (such as payments received)
- All finance charges for the billing cycle, itemized as interest, late fees, minimum fees, annual fees, etc.
- The balance on which the finance charge was computed and a statement as to how the balance was arrived at
- The APR
- The final balance
- The date by which payments must be made to avoid any finance charge
- The address of the creditor for purposes of disputing charges or other inquiries
Example: Felix Shoppor gets his monthly Vista Account statement and thinks that the interest charges on his unpaid balance seem rather high. He reads the "fine print" about how the finance charges are calculated and discovers that the interest was computed against the total balance owed (beginning balance + charges during the billing cycle) without subtracting credits for payments made during the billing cycle. This practice is legal but, as Felix discovered, results in higher interest charges than one might expect.
Watch out for…Short Billing Cycles And Rate Hikes
A number of credit card issuers have shortened their billing cycles which means that you have less time to pay your bill, or a shorter grace period, before being charged interest and late fees.
While federal law requires that credit card payments be credited to the account on the day it was received, there are loopholes. One or two issuers require that the payment arrive by 10 a.m. for the payment to be posted on that date. Any payment that does not conform to the requirements set by the issuer (for example, payment by check or money order, inclusion of the payment coupon, using the envelope provided, etc.) can be posted as late. As of now, federal law does not cover payments made electronically.
Credit card issuers can change interest rates on you, too. Sometimes, how you use your card can trigger an interest rate increase. For example, if your unpaid balance rises over some unspecified (to the customer) limit, you may be notified of a rate increase. If you are late with your payment more than once during some time period (such as six-months), that might also trigger a rate increase.
A credit card issuer must give you written notice of any change 15 days before the change takes place. This applies to the length of the billing cycle, interest rates, or any other change in conditions. To protect yourself, read those pesky inserts! Notice of changes in fees, interest rates, and other things often go unnoticed by the card user because the announcement is part of a packet of solicitations that comes with the monthly statement.
For your information…Choosing a Credit Card
- Not all credit cards are created equal. This is especially true when choosing among so-called "bank" cards, such as Visa and MasterCard. Issuers of these cards vary widely in the credit terms they offer. Some of the factors you should consider when shopping for a credit card are:
- How long the introductory rate will last
- What the APR will be when the introductory rate expires
- Whether the special introductory APR applies to only transferred balances, only new charges, or both
- Whether there are any special rules that you need to follow to maintain the lower APR.
- Grace Period – This is important if you tend to completely pay off your balance every month. If there is no free period, interest charges will accrue with each new purchase. Remember, the grace period applies only if you pay your balance in full.
- How long is the time you have to pay your bill before interest charges are assessed?
- Fees – Some banks charge annual fees for their cards. Other fees to be aware of are late fees and over-the-credit-limit fees.
- How much is the annual fee?
- Is there something you can do to have the fee waived?
- Is there a card which has no annual fee?
- If you tend to pay your bill close to its due-date, what is the late fee?
- If you tend to keep your balance close to your card's credit limit, what is the over-the-limit fee?
- Finance charge calculation – Finance charges can be calculated several different ways:
- The "adjusted balance method," where payments are subtracted from the balance before the finance charges are calculated, is the one most favorable for the consumer.
- The "previous balance" method is the least beneficial for the consumer because if the balance is not paid in full, interest charges are assessed on the outstanding balance at the beginning of the billing cycle (payments are not subtracted).
- The "average daily balance" method falls in between the others, and is probably the most common method.
Dealing With Errors
In addition to disclosure requirements, TILA establishes a three-step procedure by which consumers can dispute errors in their credit card periodic statements:
- If you notice an error in your statement, or question the validity of a charge, you must notify the credit card company in writing (at the address listed on the periodic statement) of the error within 60 days of the date of the billing statement. You will need to identify yourself, using the same name as on the credit card, give the account number, and describe the nature of the claimed billing error. If the problem is that you cannot identify a charge, ask the company to send "documentary evidence" such as a copy of the sales slip for that charge. Keep a copy of the letter for your files. Many credit card companies provide the consumer with a toll-free telephone number for inquiring about billing, and will correct errors this way without a problem. But you should protect yourself with a follow-up letter detailing the problem and the resolution agreed upon during the telephone conversation.
- The credit card company must send an acknowledgment of the complaint to you within 30 days of receiving the notice of error. If the error is the credit card company's mistake, you may simply find the next bill has the correction.
- The credit card company must, within two billing cycles or 90 days (whichever is shorter), either correct the error or provide you with an explanation for the charge, if you requested this. The company must also provide you with documentary evidence (such as a copy of the receipt) of the validity of the disputed charge.
You are not liable for the disputed charge from the time you notify the credit card issuer of the error until the matter is resolved. Finance charges (interest or late fees) may not be assessed on the disputed amount. Finance charges may be assessed later if the charge is found to be valid. You must, however, pay the undisputed portion of your bill by the due date to avoid interest and late charges on that portion of your bill.
If a credit card company fails to comply with this procedure, it forfeits its right to collect on the disputed debt and also forfeits any finance charge attributable to the disputed charge to a maximum of $50.
Lost Or Stolen Credit Cards
An amendment to TILA in the early 1970s limits liability for consumers whose credit cards are lost or stolen. A consumer must pay only the first $50 in unauthorized charges on each lost or stolen credit card.
It is very important to act quickly when you discover that your credit cards are gone because you can limit even the $50 liability. Once you notify a credit card company of the loss of a card, you are not liable for unauthorized charges made after that time, even the first $50. Thieves and others who make unauthorized charges tend to make the charges very soon after acquiring the card, so it is rather difficult to avoid paying the $50 initial liability unless the credit card company waives it for you.
Note: This rule does not apply to ATM or debit cards. For more information, refer to Extra Note: Debit (ATM) Cards.
For your information…Minimum Payments
As of January 2006, the minimum payments on credit cards must be high enough to cover fees, finance charges, and at least 1% of principal owed. The result is higher minimum payments than credit card users have experienced previously. According to the Institute of Consumer Financial Education, the minimum required payment on a $10,000 balance that had been $200 could increase to $400. The higher required payments may be troublesome for some credit card users. The up-side is that those who pay only the minimum required payment will be paying off the balance owed, not just paying interest. A $10,000 credit card balance with 18% APR would be paid off in 15 years, rather than the 58 years and almost $29,000 in interest payment under the old system.
Points To Remember
- Expect a low credit limit on a new credit card. The issuer will want to make sure that you pay your bills on time.
- Examine your credit card statements carefully each month, checking for errors. Mistakes do happen - a charge listed twice, transposed numbers, a payment not credited, etc. Keep your credit receipts to verify the charges you make. You should also remember that you have certain protections while the billing error is being investigated. Some of these are discussed above, but bear repeating:
- You do not have to pay the disputed portion of the bill
- You do not have to pay finance charges or late payment fees on the disputed amount
- Your account may not be closed or canceled due to the dispute
- Your credit rating may not be threatened due to the dispute
- If the credit card company finds no error, or they send you the requested documentation for a charge, you then have ten (10) days to pay the disputed portion of the bill before any penalties or finance charges are imposed.
- Keep a list of all your credit card numbers and their toll-free telephone numbers in case your cards are lost or stolen.
- Call the credit card company and report your loss as soon as you discover your credit card is missing. Each credit card company should have provided you with a toll-free telephone number, and an address, for just such emergencies. (Look on your last statement if you cannot find initial credit agreement documents.)
- Send a letter, preferably by certified mail, to the credit card company(s) repeating the information you provided during the telephone conversation with the company representative, including the name of the representative. Be sure to make a copy of the letter for your files.
- Check your bills very carefully over the next few billing cycles to find unauthorized charges. Remember, you are responsible for only a maximum of $50 on each card that was lost or stolen.
- Notify the credit card company of any unauthorized charges when you send your payment for authorized (legitimate) charges.
- Never give your credit card number out over the telephone unless YOU initiated the telephone call (for example, you call a catalog company to place an order). Credit card numbers can be "stolen" by a fraudulent telemarketer asking you to provide your credit card number for "verification."
- Never return a credit card through the mail without first cutting it up into pieces.
- If you receive an unsolicited credit card (one you did not apply for and do not want), cut it up and return it to the issuer. Notify both the New Hampshire Consumer Protection Bureau and the Federal Trade Commission.
- Pay your credit card bill within days of receiving it. While the US Postal Service indicates that 90% of domestic mail arrives at its destination within three mailing days, the credit issuers may need additional time to process the payments, sometimes up to a week if the payment does not meet the requirements set by the issuer.
- If the due date is inconvenient for you (for example, the bill arrives after all your other bills have been paid), call the credit card issuer and have your due date changed.
Where To Go If You Have A Problem
Contact the NH Consumer Protection Bureau:
NH Consumer Protection Bureau
Department of Justice
33 Capitol Street
Concord, NH 03301-6397
If the problem is with an out-of-state retailer, contact the Federal Trade Commission:
Federal Trade Commission
600 Pennsylvania Ave., NW
Washington, DC 20580
1-877-FTC-HELP or 1-877-382-4357 (toll-free)
Contact the credit card company any time you find an unauthorized charge on your bill. A telephone number for this purpose should appear on your bill.