Consumer Law

Using Credit Cards Correctly in Trying Economic Times

Federal and state laws impose a variety of obligations on credit card companies. These laws regulate areas such as discrimination, information disclosure, billing, and debt collection. If you don't understand how credit cards work and what your rights are, your credit card application may be unfairly refused, your contract may contain unfair terms, you may be defrauded, or you may have to deal with aggressive debt collectors.

Discrimination in Credit Decisions is Illegal

The U.S. Equal Credit Opportunity Act prohibits credit card issuers from discriminating against your application based on your race, skin color, religion, national origin, gender, marital status, or age. It also prohibits credit card issuers from discriminating against you because you receive public assistance, such as food stamps. This law not only prevents credit card issuers from rejecting your application, but also prevents them from imposing tougher conditions, such as higher interest rates, for illegal reasons. Some states have also enacted equal credit opportunity laws. If you are a victim of discrimination, you are entitled to file a lawsuit against the credit card issuer.

Credit Card Disclosures

The U.S. Truth in Lending Act requires that credit card issuers provide you with a disclosure statement before you sign a credit card contract. In many cases, this disclosure statement is contained in the contract itself. The disclosure statement must include your annual percentage rate, method of determining finance charges, and the amount of any membership fees. You must sign this document. Be sure you fully understand it before you sign to protect yourself from fraudulent or shady business practices.

Irresponsible Credit Billing Practices

Billing disputes occur from time to time. You may be billed for merchandise you never received, for example, or a fraudulent charge might appear on your bill. The U.S. Fair Credit Billing Act imposes dispute settlement procedures that your credit card issuer must comply with. It limits your liability for fraudulent charges to $50. Dispute settlement procedures require that credit card issuers provide you with an address for billing inquiries. If you have a complaint, you must write a letter to this address. The credit card issuer must resolve the dispute within 90 days.

Credit Card Debt Collectors

The U.S. Fair Debt Collection Practices Act limits the actions that creditors can take to collect debts. A debt collector, for example, cannot contact you before 8 a.m. or after 9 p.m. You can stop a debt collector from contacting you by sending a demand in writing by certified mail. Once the debt collector receives the letter, it may not contact you except to tell you there will be no further contact, or to notify you that it will take a specific action such as filing a lawsuit. This Act includes many other restrictions on the actions of debt collectors.

A Consumer Lawyer Can Help

The law surrounding credit cards and consumer rights is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a consumer lawyer.

Q: A lender turned down my application because of something on my credit report. What can I do?

  • A:If a lender refuses you credit because of unfavorable information in your credit report, you have a right to get the name and address of the agency that keeps your report. Then, you may either request information from the credit bureau by mail or in person. You may not get an exact copy of the file, but you'll learn what's in the report.

    The law also says that the credit bureau must help you interpret the data in the report, because the raw data may take experience to analyze.

    If you're questioning a credit refusal made within the past 60 days, the bureau cannot charge a fee for giving you information.

Q: Are credit companies required to give a grace period on purchases before beginning finance charges?

  • A:Creditors must tell you when finance charges begin on your account, so you know how much time you have to pay your bill before a finance charge is added. Creditors may give you a 25-day grace period, for example, to pay your purchase balance in full before you must pay a finance charge.

Q: Can a creditor cut off, or not approve, credit because an individual is a certain age?

  • A:In the past, many older persons have complained about being denied credit because they were over a certain age. Or when they retired, they often found their credit suddenly cut off or reduced. So the law is very specific about how a person's age may be used in credit decisions.

    A creditor may ask your age, but if you're old enough to sign a binding contract (usually 18 or 21 years old depending on state law), a creditor may not:

    • Turn you down, offer you less credit, or offer you less favorable credit terms because of your age
    • Ignore your retirement income in evaluating your application
    • Close your credit account or require you to reapply for it because you reach a certain age or retire
    • Deny you credit or close your account because credit life insurance or other credit-related insurance isn't available to a person your age

    Creditors may "score" your age in a credit-scoring system, but if you're 62 or older you must be given at least as many points for age as any person under 62.

    Because individuals' financial situations can change at different ages, the law lets creditors consider certain information related to age, such as how long until you retire or how long your income will continue. An older applicant might not qualify for a large loan with a very low down payment and a long term, but might qualify for a smaller loan, with a larger down payment and a shorter term. Remember that, although declining income may be a handicap if you're older, you can usually offer a solid credit history to your advantage. The creditor has to consider all the facts and apply the usual standards of creditworthiness to your particular situation.

Q: Does Truth in Lending set the rates that can be charged?

  • A:Truth in Lending doesn't set the rates or tell the creditor how to calculate finance charges. It requires only that the creditor tell you the method that it uses. You should ask for an explanation of any terms you don't understand.

Q: Don't I have a "cooling off period" on all credit transactions?

  • A:No. Truth in Lending gives you a chance to change your mind on one important kind of transaction - when you use your home as security for a credit transaction. For example, when you are financing a major repair or remodeling and use your home as security, you have three business days, usually after you sign a contract, to think about the transaction and to cancel it if you wish. The creditor must give you written notice of your right to cancel, and if you decide to cancel, you must notify the creditor in writing within the three-day period. The creditor must then return all fees paid and cancel the security interest in your home. Until the three days are up, a contractor may not start work on your home, and a lender may not pay you or the contractor. If you must have the credit immediately to meet a financial emergency, you may give up your right to cancel by providing a written explanation of the circumstances.

Q: How do creditors figure finance charges?

  • A:Some creditors take the amount you owed at the start of the billing cycle and subtract any payments made during that cycle. New purchases aren't counted. This is called the adjusted balance method.

    With the previous balance method, creditors simply use the amount owed at the start of the billing cycle to compute the finance charge.

    Under one of the most common methods, the average daily balance method, creditors add your balances for each day in the billing cycle and then divide that total by the number of days in the cycle. Payments made during the cycle are subtracted to get the daily amounts, and depending on the plan, new purchases may or may not be included.

    Under another method, the two-cycle average daily balance method, creditors use the average daily balances for two billing cycles to compute your finance charge. Again, payments will be subtracted to get the balances, but new purchases may or may not be included.

    Be aware that the amount of the finance charge will vary considerably depending on the method used, even for the same pattern of purchases and payments.

Q: How long does information remain on my credit report?

  • A:There is a limit on how long certain information may be kept in your file:

    • Bankruptcies can't be reported after 10 years. However, information about any bankruptcies at any time may be reported if you apply for life insurance with a face value over $150,000, for a job paying $75,000 or more, or for credit with a principal amount of $150,000 or more.
    • Suits and judgments paid, tax liens, and most other kinds of unfavorable information can't be reported after seven years.

Q: I lost my wallet, and credit cards. What am I responsible for?

  • A:If your wallet is stolen, your greatest cost may be inconvenience, as your liability on lost or stolen cards is limited under Truth in Lending. You don't have to pay for any unauthorized charges made after you notify the card company of loss or theft of your card. So keep a list of your credit card numbers and notify card issuers immediately if your card is lost or stolen. The most you will have to pay for unauthorized charges is $50 on each card, even if someone runs up several hundred dollars worth of charges before you report a card missing.

Q: Is it legal for a creditor to cancel my account because I'm a divorced woman?

  • A:Married women have sometimes faced severe hardships when cut off from credit after their husbands died. Single women have had accounts closed when they married, and married women have had accounts closed after a divorce.

    The law says that creditors can't make you reapply for credit because you marry or become widowed or divorced. They also can't close your account or change the terms of your account on these grounds. There must be some sign that your creditworthiness has changed. For example, creditors may ask you to reapply if you relied on your ex-husband's income to get credit in the first place.

    Setting up your own account protects you by establishing your own history of how you handle debt. You can rely on this record if your financial situation changes if you become widowed or divorced. If you're getting married and plan to take your husband's surname, write to your creditors and tell them you want to keep a separate account.

Q: My bill arrives just days before it is due, leaving me facing finance charges. This can't be legal.

  • A:If your account is one on which no finance or other charge is added before a certain due date, then creditors must mail their statements at least 14 days before payment is due.

Q: My couch arrived damaged, but the merchant is still charging me. Is this right?

  • A:Your new sofa arrives with only three legs. You try to return it with no luck. You ask the merchant to repair or replace it; still no luck. The Fair Credit Billing Act allows you to withhold payment on any damaged or poor-quality goods or services purchased with a credit card, as long as you have made a real attempt to solve the problem with the merchant.

    This right may be limited if the card was a bank or travel and entertainment card or any card not issued by the store where you made your purchase. In such cases, the sale must have been for more than $50 and must have taken place in your home state or within 100 miles of your home address.

Q: There is an error on my credit report. Doesn't the credit bureau have to help fix this?

  • A:If you notify the bureau about an error, the bureau must investigate and resolve the dispute within 30 days after receiving your notice. The bureau will contact the creditor who supplied the data and remove any information that is incomplete or inaccurate from your credit file. If you disagree with the findings, you can file a short statement (100 words) in your record, giving your side of the story. Future reports to creditors must include this statement or a summary of it.

Q: What are the penalties if a creditor breaks the law?

  • A:It depends on what law applies: Under the Truth in Lending and Consumer Leasing Acts, if any creditor fails to disclose required information or gives inaccurate information, or doesn't follow the rules about credit cards or the right to cancel certain home-secured loans, you can sue for actual damages and any money loss you suffer.

    In addition, you can sue for twice the finance charge in the case of certain credit disclosures, or if a lease is concerned, 25 percent of total monthly payments. In either case, the least the court may award you if you win is $100, and the most is $1,000. In any lawsuit you win, you're entitled to reimbursement for court costs and attorney's fees.

    Class action suits are also permitted. A class action suit is one filed on behalf of a group of people with similar claims.

    Under the Equal Credit Opportunity Act, if you think you can prove that a creditor has discriminated against you for any prohibited reason, you can sue for actual damages plus punitive damages, that is, damages for the fact that the law has been violated - of up to $10,000. In a successful lawsuit, the court will award you court costs and a reasonable amount for attorney's fees. Class action suits are also permitted.

    Under the Fair Credit Billing Act, a creditor who breaks the rules for the correction of billing errors automatically loses the amount owed on the item in question and any finance charges on it, up to a combined total of $50, even if the bill was correct. You can sue for actual damages plus twice the amount of any finance charges, but in any case not less than $100 nor more than $1,000. You're also entitled to court costs and attorney's fees in a successful lawsuit. Class action suits are also permitted.

    Under the Fair Credit Reporting Act, you may sue any credit-reporting agency or creditor for breaking the rules about who may see your credit records, or for not correcting errors in your file. Again, you're entitled to actual damages, plus punitive damages that the court may allow if the violation is proved to have been intentional.

    In any successful lawsuit, you will also be awarded court costs and attorney's fees. A person who obtains a credit report without proper authorization or an employee of a credit-reporting agency who gives a credit report to unauthorized persons may be fined up to $5,000 or imprisoned for one year, or both.

Q: What do I do if I find an error on my account?

  • A:If you think your bill is wrong, or want more information about it, follow these steps:

    • Notify the creditor in writing within 60 days after the first bill was mailed that showed the error
    • Be sure to write to the address the creditor lists for billing inquiries and to tell the creditor
    • Give them your name and account number
    • State that you believe the bill contains an error and why you believe it is wrong and
    • Provide the date and suspected amount of the error or the item that you want explained

    Pay all parts of the bill that aren't in dispute. But while waiting for an answer, you don't have to pay the amount in question (the "disputed amount") or any minimum payments or finance charges that apply to it.

    The creditor must acknowledge your letter within 30 days unless the problem can be resolved within that time. Within two billing periods, but in no case longer than 90 days, your account must be corrected or you must be told why the creditor believes that the bill is correct.

    If the creditor made a mistake, you don't pay any finance charges on the disputed amount. Your account must be corrected, and you must be sent an explanation of any amount you still owe.

    If no error is found, the creditor must send you an explanation of the reasons for that finding and promptly send a statement of what you owe, which may include any finance charges that have accumulated and any minimum payments you missed while you were questioning the bill. You then have the time usually given on your type of account to pay any balance.

    If you still aren't satisfied, you should notify the creditor in writing within the time allowed to pay your bill.

    A creditor may not threaten your credit rating while you're resolving a billing dispute.

Q: What factors can a creditor "not" use in deciding to grant credit?

  • A:The Equal Credit Opportunity Act requires that all credit applicants be considered on the basis of their actual qualifications for credit and not be rejected based on age, gender, marital status, race, color, religion, and national origin. The act also bars discrimination because you receive public income, such as veterans' benefits, public assistance or social security, or because you exercise your rights under federal credit laws, such as filing a billing error notice with a creditor. This protection means that a creditor may not use any of these grounds as a reason to:

    • Discourage you from applying for a loan
    • Refuse you a loan if you qualify
    • Lend you money on terms different from those granted another person with similar income, expenses, credit history, and collateral
    • Close an existing account because of age, gender, marital status, race, color, religion, national origin, receipt of public income or because you exercise your rights under federal credit laws

    Although creditors may not discriminate on the basis of national origin, they may consider your immigration status when making a loan decision.

Q: What is considered a billing error?

  • A:The law defines a billing error as any charge:

    • For something you didn't buy, or for a purchase by someone not authorized to use your account
    • That isn't properly identified on your bill, or is for an amount different from the actual purchase price, or was entered on a date different from the purchase date
    • For something you didn't accept on delivery or that wasn't delivered according to agreement.

    Billing errors also include:

    • Errors in arithmetic
    • Failure to show a payment or other credit to your account
    • Failure to mail the bill to your current address, provided you told the creditor about an address change at least 20 days before the end of the billing period
    • An item on your bill for which you need more information

Q: What is the connection between the finance charge and annual percentage rate?

  • A:The finance charge is the total dollar amount you pay to use credit. It includes interest costs and other costs, such as service charges and some credit-related insurance premiums. The annual percentage rate is the percentage cost (or relative cost) of credit on a yearly basis, which is your key to comparing costs, regardless of the amount of credit or how long you have to repay it.

    The higher the annual percentage rate, the higher the potential finance charge for the use of credit.

    All creditors' banks, stores, car dealers, credit card companies and finance companies must state the cost of their credit in terms of the finance charge and the APR. Federal law doesn't set interest rates or other credit charges. But it does require their disclosure so that you can compare credit costs. The law says these two pieces of information must be shown to you before you use a credit card.

Q: What laws apply to credit?

  • A:Truth in Lending laws require creditors to give you certain basic information about the cost of buying on credit or taking out a loan. These "disclosures" can help you shop for the best deal. It also gives you three days to change your mind about certain credit transactions that use your home as collateral, and limits your risk on lost or stolen credit cards.

    Consumer Leasing disclosures can help you compare the cost and terms of one lease with another and with the cost and terms of buying for cash or on credit.

    The Equal Credit Opportunity Act gives women a way to build their own credit history and identity.

    The Fair Credit Reporting Act sets up a procedure for correcting mistakes on your credit record.

    The Fair Credit Billing Act sets up procedures requiring creditors to promptly credit your payments and correct billing mistakes, and allows you to withhold payments on defective goods.

Q: When do creditors have to credit my account with a payment?

  • A:Creditors must credit payments on the day they arrive, as long as you pay according to payment instructions (for example, sending your payment to the address listed on the bill).

Q: Who can gain access to my credit report?

  • A:Your credit record may not be given to anyone who doesn't have a legitimate business need for it. Stores to which you are applying for credit may examine your record, but curious neighbors may not. Prospective employers may examine your record with your permission.

Q: Who do I file a complaint with if I can't resolve an issue with a creditor?

  • A:If you have a complaint about a bank or other financial institution, the Federal Reserve System may be able to help you. FRS personnel investigate consumer complaints received against state-chartered banks that are members of the System. Complaints about these types of banks will be investigated by one of the 12 Federal Reserve Banks around the country. The Federal Reserve will refer complaints about other institutions to the appropriate federal regulatory agency and let you know where your complaint has been referred. Or you may write directly to the appropriate federal agency by referring to the listing at the end of this publication. Many of these agencies don't handle individual complaints, but they'll use information about your credit experiences to help enforce the credit laws.

    When writing to the Federal Reserve, you should submit your complaint - in writing whenever possible - to the Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, Washington, DC 20551. Be sure to provide the complete name and address of the bank, a brief description of your complaint, and any documentation that may help us investigate your complaint. You shouldn't send original documents, only copies, and remember to sign and date your letter. The Federal Reserve will acknowledge your complaint within 15 business days, letting you know whether a Federal Reserve Bank will investigate your complaint or whether your complaint will be forwarded to another federal agency for attention.

    For complaints investigated by the Federal Reserve (those involving state-chartered member banks), the Reserve Bank will analyze the bank's response to your complaint to ensure that your concerns have been addressed, and will send you a letter about the findings. If the investigation reveals that a Federal Reserve regulation has been violated, the Reserve Bank will inform you of the violation and the corrective action the bank has been directed to take.

    Although the Federal Reserve investigates all complaints about the banks it regulates, it doesn't have the authority to resolve all types of problems, such as contractual or factual disputes or disagreements about bank policies or procedures. In many instances, however, if you file a complaint, a bank may voluntarily work with you to resolve your situation. If the matter isn't resolved, you may need a lawyer to resolve your complaint.

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