Know Before You Go... To Choose or Use a Credit Card

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In July 2010, credit card rules will change. In the meantime, here is a guide to current rules, with information about the changes to come, to help you when you consider which credit card offer you might want to apply for or accept. Think carefully about your spending patterns when you are looking at an offer and what features might be important to you. Do you pay off your card in full each month? Do you really need cash advances? Do you want to own a card jointly or on your own? Do you want a card with a “cash back” feature, frequent flyer miles, gasoline discounts? Finally, consider how you pay—will the billing cycle match your pay dates, or might you run the risk of late payments? Do you want to authorize automatic withdrawals from another account, at the same or a different bank? What impact will that decision have on your finances? This brochure is written to help you make decisions that are right for YOU when you choose a card.

True or False?

1. All credit card offers have the same terms. See/Hide Answer

False: Credit card offers vary, depending on the bank involved and to whom the credit card is offered.1 Be sure to read all of the terms and conditions carefully to see what you will be charged, not only for an annual percentage interest rate, “APR,” but for such things as late, over-the-limit, and bounced check fees that can quickly add up. In addition, check to see if the card offers a grace period during which finance charges do not accrue if you make full payments every month. Also review any benefits the card may offer, e.g., cash back bonus awards, miles, shopping points, and any associated annual fees for such benefits.

1Those with higher credit scores may be offered more favorable terms.

2. Interest rates are limited by my state’s law. See/Hide Answer

False: Credit card interest rates are controlled by the state of the issuing bank, not the state you live in, so rates can vary widely.

3. All purchases and extensions of credit on a credit card are treated the same way. See/Hide Answer

False: Carefully review and understand the terms of your account for each transaction type before using your card; issuers generally apply different standards to purchases, cash advances and balance transfers. Each of these may carry different APRs. In addition, you may be given a grace period for purchases allowing you to avoid interest by paying your balance on time, in full each month. On the same account, however, interest may start to accrue immediately on cash advances. And if you decide to transfer a balance from another card, you may be charged a flat fee and interest until the balance is paid off.

4. I am married and therefore must have all joint cards with my spouse. See/Hide Answer

False: You can apply for an individual credit card, in your name alone, based on only your credit history. You alone are responsible for this card. You may authorize others to use your card, but you are still responsible for the debt.

5. Paying the minimum monthly balance on my credit card is the best way to manage my credit. See/Hide Answer

False: If you pay only the minimum monthly balance, it can take years to pay off your purchases, and with compounding interest, you may be paying for whatever you bought many times over. For example, if your minimum monthly payment is only two percent of the balance, and if you charged $2,000 on a credit card with an 18 percent Annual Percentage Rate, it would take about 30 years to pay it off with minimum payments. It would cost you about $5,000 in interest payments! Minimum payments recently changed to four percent with most card companies, and at that rate, you would pay the debt in 10 years and pay $1,000 in interest. While repaying the debt at four percent may seem burdensome, the higher repayment rate will save you thousands of dollars in interest payments in the long run.

Effective July 2010, card issuers will be required to provide: 1) a “warning” statement indicating that making only the minimum payment will increase the interest you will pay and the time it takes to repay the balance; 2) a hypothetical example of how long it would take to pay a specific balance in full if only minimum payments are made; and 3) a toll-free telephone number that you may call to obtain an estimate of the time it would take to repay your balance using minimum payments.

The card issuer may establish a toll-free number to provide customers with the actual number of months it will take the consumer to repay the balance instead of providing a hypothetical schedule in the periodic statement. In the alternative, the card issuer can forgo the three requirements listed above and provide an actual repayment disclosure in the monthly statement. (Regulation Z)

6. Once the credit card company has granted me a card with specific terms, including a rate of interest, it cannot change those terms for any reason. See/Hide Answer

False: Credit card companies are permitted by federal law to change your rates or terms with only 15-day written notice, so you need to read all the monthly inserts and notices you receive once you get a card. Credit card company agreements may provide a number of reasons that will enable them to increase your interest rate and charge you more for late fees, over-limit fees, and other charges. For example, some card agreements increase your rate if you are over-the-limit more than once in a specific time period or if you are late more than once.

Many card companies reserve the right to change your account terms for reasons they do not specify in their original offer with broad language like: “the terms of your account are subject to change” and “we may change the terms at any time for any reason.”

Your credit card company may even change your rate based on your late payment on a completely different debt, like on some other credit card you own, or on an auto loan. This is called “universal default.” Any adverse financial information about you that hits your credit report could trigger universal default. Credit card companies may monitor your credit reports closely, so you need to be vigilant about all of your credit. (Regulation AA)

Effective July 2010, the 15-day notice requirement will be extended. Card issuers will be required to give 45-day written notice of any changes to account terms, including APR increases (penalty pricing) due to the borrower’s delinquency or default. (Regulation Z) In addition, the amended regulations place some restrictions on penalty pricing and prevent the “any time, any reason” repricing. Rate increases on new transactions during the first year after account opening will be prohibited. There are, however, several limited exceptions to the rate-increase prohibitions.2

 

2Exceptions include the following:

Card issuers can offer a discounted rate that expires after a specified time period, as long as the new rate is disclosed at account opening;

Card issuers can offer a variable rate that is tied to an index outside of the issuer’s control;

Card issuers can increase rates for new transactions (not during the first year) as long they give 45-day advance notice; and

Card issuers can increase the rate that applies to outstanding balances if the account is over 30 days delinquent.

7. I applied for and received a credit card with zero percent fixed APR on balance transfers for two years. I intend to transfer a balance from another card, and I will use the card for purchases as well. I can pay off my purchase balances in full each month and avoid any finance charges. See/Hide Answer

False: Card companies may choose how they apply the money you send, especially if you have accepted a zero percent offer for balance transfers but have another interest rate for new purchases going forward. Review your initial offer for terms like “we may apply payments and credits first to your balances with lower APRs before balances with higher APRs.” Such terms allow the card issuer to apply your payment first to the balance carrying a zero percent APR, and you will have to pay interest on your purchase balance until your transferred balance is paid in full.

So, if you decide to take advantage of a zero percent offer on a balance transfer and carry a balance for a period of time, and if purchases will carry a higher APR, you may want to consider putting purchases on a separate card or using another means of payment.

Effective July 2010, if different APRs apply to different balances on an account (e.g., purchases, balance transfers, cash advances), the card issuer must allocate payments in excess of the required minimum payment to the balances carrying the highest APR first or pro rata among all of the balances. (Regulation AA)

8. Opening a credit card account is a great way to establish a credit history that would be beneficial to obtaining other forms of credit in the future such as car loans or mortgages. See/Hide Answer

True: Financial institutions use credit reports provided by the three major credit bureaus (Experian, Transunion, Equifax) when making credit decisions. If you have no credit history upon which they can base your willingness and ability to repay your debts, financial institutions may hesitate to extend home or personal loans to you. A credit card from a major retailer or one of the major credit card issuers (MasterCard, Visa, Discover, American Express) is relatively easy to obtain. Just be sure to review all of the terms of your offer and be vigilant about paying your bills on time.

Warning: Too many open credit card accounts and too many applications can adversely affect your credit rating. In addition, maintaining high balances may also negatively affect your credit report and credit score.

9. I am more protected in credit card transactions than cash, check, or debit card transactions. See/Hide Answer

True: Federal Reserve Regulation Z, which implements the Truth-in-Lending Act, provides specific protections for consumers in credit card transactions when there is a billing error, unauthorized use (card is lost or stolen), or a purchase dispute. Regulation Z protections do not apply to cash, checks, or debit card transactions.

Billing Error
Regulation Z protects consumers in billing error3 disputes with card issuers. If you find a billing error on your monthly statement, you must notify the creditor in writing within 60 days after the first bill showing the error was mailed. Just calling the creditor is not sufficient to preserve your rights under this regulation. Be sure to include your name and account number, the reason you believe there is an error, the date of the error, and the dollar amount. The card issuer has to acknowledge your letter within 30 days or resolve the situation within that time. Or, the card issuer has up to 90 days to investigate and resolve your dispute. While waiting for the resolution, you are not required to pay the amount in question or any associated finance charges. (The card issuer cannot report you to the credit bureau as delinquent, and it cannot try to collect the disputed amount). You do have to pay other charges not in dispute and related finance charges.

If the card issuer determines that there was a billing error, it must correct the error and credit your account. If the card issuer determines that no error occurred, you must pay the amount owed and any finance charges that accrued. You must receive a written explanation of the reasons for the finding. You are entitled to documentation of the finding upon request.4

Lost or Stolen Card
If your credit card is lost or stolen, Regulation Z places a limitation on your liability: $50 maximum.5

Asserting Claims and Defenses
This protection will apply if you don’t get what you ordered as the merchant promised. Regulation Z provides you with rights regarding resolution of disputes involving goods or services purchased with a credit card if:

You have made a good faith effort to resolve the dispute with the merchant,

The dollar amount in question is more than $50, and

The disputed transaction took place in the state where you live or within 100 miles of you.

If these three conditions are met, you may assert the claims and defenses you would normally have against the merchant, against the card issuer.

3Billing error is broadly defined in Regulation Z to include computational errors as well as billing for property or services not accepted or delivered as agreed upon.
4Note that billing error instructions must be provided on the back of every credit card monthly statement.
5MasterCard and Visa have a zero dollar liability for lost or stolen credit cards.

10. I received a credit card offer in the mail (zero percent on purchases for one year with a credit line of up to $5,000) that said due to my excellent credit history, I have been pre-approved for this special offer. If I apply, I am guaranteed to get this card at the stated rate. See/Hide Answer

False: Under federal law, card issuers may send you credit card solicitations that say you are “pre-approved,” but the offer is not final until the credit card company checks your full credit history. And once they have done a credit check, the offer may change. While you must be made a “firm offer of credit” in order to be sent a pre-approval, you may not get the card at the rate provided in the initial mailing.

And even if you do get the rate that was promised in the pre-approval, that rate may change at any time. If you default on a payment, i.e., you fail to pay on time, exceed the credit line, or make a payment that is not honored by the bank, the card issuer could increase the APR substantially.

In addition, you are not guaranteed the credit line amount originally offered. The amount of your initial credit line will be based on your credit profile at the time your account is opened. If you do not meet the card issuer’s specific requirements, they may not extend credit to you at all.

11. Federal law requires that credit card companies make specific term disclosures in their credit card offers. You should use these terms to compare offers and determine the most appropriate card for you. See/Hide Answer

True: Regulation Z, which implements the Truth-in-Lending Act, requires that all credit card applications or solicitations contain certain items in a specific table format with headings, commonly referred to as the Schumer Box. Use terms such as APR, minimum finance charge, grace period, cash advance fee, balance transfer fee, late fee, and over-the-limit fee to determine which offer is most appropriate for you.

Be sure to review the terms outside of the Schumer Box as well. Sometimes the big differences between cards are in the fine print.

Understanding the terms of your credit card will soon be easier. Effective July 2010, card issuers will be required to adopt new disclosure formats that will make account solicitations and applications, account opening disclosures, and monthly statements more meaningful and easier to read. (Regulation Z)

12. If I plan to carry a balance on my credit card, I should purchase credit protection insurance in case I am not able to make my payments. See/Hide Answer

False: Don’t automatically assume that this product is right for you. Be sure to evaluate the terms carefully before purchasing this product.

Credit protection insurance is offered by credit card companies in the event that you cannot make your required payments. If, for example, you suffer job loss or short-term disability, must take unpaid family leave, or fulfill military obligations, the credit card company may either defer payments, finance charges, and late fees or make your minimum payments for you. The company may also offer this insurance in the event of marriage, adoption, divorce, or birth of a child. Before signing up for credit insurance, consider the following:

If you file an insurance claim, will you still be able to use your credit card? For instance, if you file a claim because of job loss, the credit card company may no longer extend credit to you because you have no income. However, if you file a claim because of a marriage, you may still be able to use the card.

Ask the credit card company to explain the insurance terms. For example, if the insurance covers hospitalization, is there a minimum hospitalization period required before the insurance is available? Does this coverage impact other medical insurance you may have or vice versa?

Is there is a monthly fee?

If the card company defers your payments, and you make a payment, your regular payment cycle is reinstated. Under what circumstances will you be required to make at least minimum payments again?

In the event of marriage, adoption, baby, or divorce, the card company will make two months minimum payments. Interest, however, will continue to accrue.

What documentation does the credit card company require before it accepts your claim?

Can you afford the insurance payments? The cost of credit protection insurance may fluctuate depending on your credit card balance. For instance, a company’s fee may be $0.85 for every $100 of your balance. If your balance is $5,000, then your monthly payment for the insurance would be $42.50. This amount would be in addition to you regular monthly payments.

13. I received blank checks in the mail from my credit card company. I can use these checks to pay off any of my debts, including balances on my other credit cards. The APR charged on the checks is lower than the purchase or balance transfer rate on my card, so I should definitely take advantage of this great deal to consolidate some of my debts. See/Hide Answer

False: Credit card checks may be appropriate for some borrowers but not others. Before using the checks issued by your credit card company, consider the following:

You cannot use these checks to pay off credit cards in your wallet that are issued by the same credit card company.

The debts you pay off with these checks will be added to your credit card balance. If you carry a balance from month to month, the card company can apply your payments to the balance that carries the lowest APR first. So, your balances carrying higher APRs will stay on your card longer and continue to accrue interest at those higher rates, costing you even more money. If you go over your credit limit, you will also be charged over-the-limit fees.

You may be charged a fee for use of these checks.

A high balance on one credit card may adversely affect your credit rating. For this reason, be careful not to consolidate too much credit onto one card.

Currently, card issuers are not required to provide cost disclosures with these checks; the issuer can just refer the borrower to their original account agreements. Effective July 2010, card issuers will be required to disclose key terms such as introductory rates and their expiration dates, rates that will apply after introductory rates expire, fees, and grace periods(or lack thereof), in a summary table on the front of the page containing the checks. (Regulation Z)

14. My poor credit history will prevent me from getting a credit card. See/Hide Answer

False: There is a variety of credit cards developed for individuals with differing levels of credit problems. Most of these are subprime cards, often promoted as credit builder or credit repair cards.

These cards may provide you with an opportunity to rebuild or repair your credit, but they could be expensive. Because a borrower with credit history problems poses additional risk to the creditor, subprime credit cards can carry higher interest rates and fees. The fees alone, such as annual membership, account set-up, and the usual over-the-limit, late payment, and cash advance fees, can eat up over half of your credit line. So your purchasing power could be more limited than you expected. Some card issuers will require that you open and maintain a bank account balance for up to the offered credit limit as collateral.

15. A subprime credit card offer will be labeled as such. See/Hide Answer

False: Credit card issuers do not indicate in their disclosures that a card is subprime. Be sure to carefully evaluate the cost and terms associated with each offer you receive to determine which one is best for you before you apply for any given card. Once your application is approved, the subprime credit card issuer may assess your new card with many fees associated with setting up the account. These fees could add up to hundreds of dollars before you even use your card. Your buying power with this card will be limited until you pay these initial charges and free up your promised credit limit.

Effective July 2010, card issuers will be prohibited from financing security deposits and fees that together exceed 50 percent of available credit in the first year. The new rule also limits security deposits and fees charged when you open an account to a maximum of 25 percent of your initial available credit. Any additional amounts have to be spread evenly over five or more billing cycles. (Regulation AA)

Glossary of Terms You Should Know

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