Using Credit Cards
What is a Credit Card?
A credit card, such as VISA or MasterCard, allows you to pay for sales or services by borrowing against your line of credit with the credit card company and to make monthly payments on the outstanding balance. A charge card, such as American Express requires payment in full each month of the outstanding balance charged to the account.
What are the Advantages of Using A Credit Card?
- They allow you to make purchases on credit without carrying around a lot of cash;
- They allow accurate record-keeping by consolidating purchases into a single statement;
- They allow convenient ordering by mail or phone;
- They allow you to pay for large purchases in small, monthly installments; and
- Under certain circumstances, they allow you to withhold payment for merchandise which proves defective.
What are the Disadvantages?
- The ease of using credit cards, combined with impulsive buying, may result in over-spending;
- High interest rates, as well as other costs make credit cards a relatively expensive method of obtaining credit;
- Lost or stolen cards may result in some expense ($50.00) and inconvenience;
- The use of multi-credit cards can get you even further into debt; and
- Fraudulent or unauthorized charges may take months to dispute, investigate, and resolve.
How Do I Get a Credit Card?
You must complete an application. A credit card cannot be issued unless requested. Issuers often acquire names of consumers with good credit ratings from a credit reporting agency and send the consumers "preapproved" applications.
Card issuers are permitted to mail you an application or a solicitation for a credit card or to ask you by phone whether you want to receive a card and to send you a card if you say yes.
An issuer will consider your employment, current assets, current debts, and credit history when you apply for a credit or charge card.
If you have had a poor credit history, some companies will issue you a "Secured" credit card. The issuer requires you deposit money in an account and allows you to make credit purchases up to the amount on deposit. Consumers who wish to use such plans to rebuild their credit record should make certain that the deposits are held in a protected escrow account.
How Does a Credit Card Work?
When you have been issued a credit card you are given a line of credit. You can make purchases or receive cash advances up to that amount with your card. When you make a purchase, the merchant gives proof of your purchase to the credit card company and they pay the merchant on your behalf; in effect granting you a loan.
The credit card issuer then bills you for reimbursement of the purchase or cash advance amount. You can either pay the balance in full or make payments. The issuer must send you periodic billing statements giving you information on your account which includes the minimum payment due, date it is due, and the periodic interest rate on unpaid balances.
Credit Card Terms and Processes
Annual Percentage Rate (APR): A yearly rate of the cost of your credit credit transactions, including interest, prepaid finance charges and other finance charges. This rate is also expressed as a "periodic rate."
Average Daily Balance: A balance used to compute interest on a daily basis. The balance used is the average amount you owe during each day of the billing period. The daily balance includes the current outstanding balance plus any new charges and minus any payments or credits. This method is used by most card issuers and results in lower charges when compared to calculating interest on the outstanding balance at the end of the billing period.
Balance Calculation Method: The method used by a credit card issuer to calculate the interest due each month based on the outstanding balance at the end of the billing period.
Balance Transfer Program: A program offered by card issuers to entice cardholders to utilize the card issuer's credit card to pay-off other credit cards, effectively transferring the balance of existing cards to the new card. Transfers of the balance owed may occur through the use of special checks or may be handled directly by the issuer on your behalf.
Cash Advance Fee: A charge for obtaining cash by use of your card. Fees usually vary from 2 - 5% of the amount advanced.
Credit Limit: The maximum amount of charges you may incur on your card.
Daily Periodic Rate: The interest rate factor used to calculate the interest charges on a daily basis. The factor is computed by dividing the yearly rate by 365 days. Used by a few card issuers, this method of computing interest can result in an effective annual percentage rate which is approximately 2% greater than yearly stated rate of interest.
Debit Card: A card which directly accesses the cardholder's checking account, providing payment for a transaction in like fashion to writing a check. No credit is extended to the cardholder; no debt is incurred.
See our Web Site on Debit Cards vs. Credit Cards.
Finance Charge: The charge for the use of credit, consisting mainly of interest costs, but also including other fees such as cash advance fees.
Fixed Interest Rate: An interest rate that changes only if the issuer notifies cardholders through an amended cardholder agreement. Federal law stipulates a minimum of 15 day's advance notice is required.
Gold Credit Card: A credit card providing above average benefits, including travel services, rental car insurance, and insurance for items purchased.
See Web Site on Gold and Platinum Cards.
Grace Period: A period of 20 - 30 days during which interest is not charged for new purchases; available on most cards. This feature is usually available only to those cardholder who do not carry a cash advance balance from the prior month.
Late Payment Fee: A fee charged for failing to submit the minimum monthly payment by its due date. The amount of the fee is usually $10 - $25, but can be higher.
Minimum Payment Due: The smallest amount which you may pay and maintain a current account. Minimum payments are usually 2 - 10% of the amount owed.
Monthly Periodic Rate: The most common interest rate factor used to calculate the interest charges on a monthly basis. The factor is computed by dividing the yearly rate by 12.
Over-Limit Fee: A fee charged for exceeding your credit limit. The fee is frequently $10 - $20, and may not be assessed unless the credit limit is exceeded by 10% or a certain dollar amount such as $100.
Rebate Card: A credit card which supplies benefits based upon the card's usage. Benefits are usually in the form of services, such as air line tickets, discounts on future purchases, or cash refunds and are based upon a percentage of the purchase amounts charged.
Secured Card: A credit card which requires the cardholder to make a security deposit, frequently in the form a savings deposit, to ensure payment of the outstanding balance should the cardholder default. Often required for those who lack credit or have had past credit problems.
See Web Site on Cards That Take Security Interests.
Variable Interest Rate: An interest rate that automatically adjusts due to fluctuations in an economic index, usually the prime rate of interest. Other indexes include the 26 week Treasury Bill Rate, the Federal Funds Rate or Discount Rate. Adjustments can made on a daily basis to an annual basis.
Avoiding Problems
Credit car debts can spiral out of control. If you have accepted a credit card and are using it, here are some ways to protect yourself from getting in over your head:
- It is important not to use credit cards to finance an unaffordable lifestyle. If you find that you are constantly using your card without the ability to pay the resulting bill in full each month, you need to consider whether you are using your cards to make an unreasonable budget plan work. No one can live forever by borrowing without a plan to pay off the resulting debts.
- If you get into financial trouble, do not make it worse by using credit cards to make ends meet. If you find that you are using credit cards to get through a period of financial difficulty, consider the likelihood that additional credit will only make thing worse. For example, if you use cash advances on your credit card to pay bills, the interest due will only add to your debt burden sooner rather than later.
- Don't get hooked on minimum payments. In most cases, the credit card lender will offer an optional "minimum payment" in their monthly billing. If you pay only the minimum, chances are that you will not be paying down your debt, or that you will be paying it off very slowly. Especially if you are also making new purchases every month. This could mean that your monthly interest obligations will increase and lower the amount of money you have in the monthly budget for necessities. In addition, lenders reserve the right to increase the minimum payment at their option. This means that you can budget for a $50 minimum payment only to find out that the new minimum payment of $100 applies.
- Don't run up the balance in reliance on a temporary "teaser" interest rate. As discussed above, money borrowed during a temporary rate period of six percent, is likely to be paid back at a much higher permanent rate of fifteen percent or more.
- Make your credit card payments on time. Be careful to avoid late payment charges and penalty rates if you can do so without endangering your ability to keep up with higher priority debts. Bad problems get worse fast when you have a new higher interest rate and late charges to pay during a time of financial difficulty. Most lenders will waive a late payment charge or default rates of interest one time only. It is worth calling to ask for a waiver if you make a late payment accidentally or with a good excuse.
- Avoid the special services, programs, and goods which credit card lenders offer to bill to their cards. You are likely to receive numerous advertisements from your credit card lender. Most of the special services such as credit card fraud protection plans, credit record protection, travel clubs, life insurance, and other similar offers are a bad deal. Products offered are generally overpriced. It is best to throw out advertisements, or at a minimum, to read them with a high degree of caution.
- Beware of unsolicited increases by a credit card lender to your credit card limit. Some lenders increase your credit limit even when you have not asked for more credit. It is easy to assume that this means that the lender thinks you can afford more credit. In fact, the opposite may be true. Lenders carry a bigger balance and pay more interest. You need to evaluate whether you can afford more credit based on your individual circumstances.
Can a Merchant Charge Me More If I Use a Credit or Charge Card?
YES, but if a merchant charges you more for using a credit or charge card, that fact and the additional amount must be disclosed to you before the sale is made. A merchant can also offer a discount to customers who pay cash.
What are my Credit Card Protections?
Federal law protects consumers when they use credit cards. Protections include the following items:
Prompt Credit for Payments. A card issuer must credit your account on the day the issuer receives your payment, unless the payment is not made according to the creditor's requirements or the delay in crediting your account does not result in a charge. A card issuer must credit your account on the day the issuer receives your payment, unless the payment is not made according to the creditor's requirements or the delay in crediting your account does not result in a charge.
Refunds of Credit Balances. When you return merchandise or pay more than you owe, you have the option of keeping the credit balance on your account or requesting a refund. To obtain a refund, write the card issuer. The card issuer must send you the refund within seven business days of receiving your request. Also if a credit balance remains on your account for more than six months, the card issuer must make a good faith effort to refund the credit balance. When you return merchandise or pay more than you owe, you have the option of keeping the credit balance on your account or requesting a refund. To obtain a refund, write the card issuer. The card issuer must send you the refund within seven business days of receiving your request. Also if a credit balance remains on your account for more than six months, the card issuer must make a good faith effort to refund the credit balance.
Errors on Your Bill. There are specific rules that the card issuer must follow for promptly correcting billing errors. The issuer must furnish you a statement describing the rules when you open a credit card account and at least once a year after that. Many issuers print your rights on their monthly billing statements. You must notify the issuer in writing at the address specified for billing errors within 60 days after the first bill containing the error was mailed to you. The issuer must look into the problem and either correct the error or explain to you why the bill is correct not later than 90 days after the issuer receives your billing error notice. During that period you do not have to pay the disputed amount or interest on that amount. There are specific rules that the card issuer must follow for promptly correcting billing errors. The issuer must furnish you a statement describing the rules when you open a credit card account and at least once a year after that. Many issuers print your rights on their monthly billing statements. You must notify the issuer in writing at the address specified for billing errors within 60 days after the first bill containing the error was mailed to you. The issuer must look into the problem and either correct the error or explain to you why the bill is correct not later than 90 days after the issuer receives your billing error notice. During that period you do not have to pay the disputed amount or interest on that amount.
Unauthorized Charges. If your credit card is used without your authorization, you can be held liable for up to $50 per card. If you report the loss before the card is used, federal law says the card issuer cannot hold you responsible for any unauthorized charges. If you have a lost or stolen credit card, report the loss as soon as possible. Most issuers have a toll-free number in service 24 hours. You should follow-up your phone call with a letter. If your credit card is used without your authorization, you can be held liable for up to $50 per card. If you report the loss before the card is used, federal law says the card issuer cannot hold you responsible for any unauthorized charges. If you have a lost or stolen credit card, report the loss as soon as possible. Most issuers have a toll-free number in service 24 hours. You should follow-up your phone call with a letter.
Disputes About Merchandise or Services. If you have a problem with merchandise or services that you charged to a credit card and have made a good faith effort to work out the problem with the seller, you have the right to withhold from the card issuer payment for the merchandise or services. If the card you used is a bank card or another card not issued by the seller of the defective merchandise, you can withhold payment only if the purchase exceeded $50 and occurred in your home state or within 100 miles of your billing address. . If you have a problem with merchandise or services that you charged to a credit card and have made a good faith effort to work out the problem with the seller, you have the right to withhold from the card issuer payment for the merchandise or services. If the card you used is a bank card or another card not issued by the seller of the defective merchandise, you can withhold payment only if the purchase exceeded $50 and occurred in your home state or within 100 miles of your billing address.
See Web Site on Credit Card Disputes.
Ways to Protect Your Credit Card
Use the following ways to guard your card and protect your account information:
- Sign It. Ensure that you sign the back of your new credit card once you receive it.
- PIN. Never write down your PIN number in a purse or wallet -- memorize it or stash it in a safety deposit box or other safe area. Make sure your PIN number isn't something obvious like a date of birth, address, or phone number.
- Return It. Make sure merchants return you credit card after a purchase. Don't be in a hurry or let other distractions keep you from getting your card back immediately.
- Watch It. Never leave your credit cards unattended or in visible sight of others. Remember, they are the same as cash.
- Be Wary. Never give your account number over the phone unless you've validated the company or individual you're speaking with.
- Check Purchases. Always verify receipts from purchases and make sure the right amount has been charged. Take all copies of receipts and carbons with you, especially ATM transactions.
- Trash It. Dispose of receipts and old credit card statements privately not publicly. Use a personal shredder or other device to ensure your name and account number are unreadable.
- Report It. Contact your creditors immediately if your credit cards have been stolen or lost.
- Record It. Make a list of your credit card account numbers and telephone numbers of creditors in case your cards are stolen or lost. Keep the list in a safe place.
- Verify. Check your credit statement right away when it arrives. Verify the amounts of purchases with sales receipts you've saved for the month. Report any discrepancies to your creditors immediately.
What Should I Do If My Credit Cards Are Lost Or Stolen?
Phone the credit card company immediately, and report that your card is lost or stolen. Your monthly billing statement will list the phone number for reporting lost cards. Be sure to get the name of the person you talked to. The issuer will cancel your card so no unauthorized charges can be made on it.
To create a record for the company and for your own files, write to the company after you have phoned. Include your name, address, account number, the date you believe the card was lost or stolen, and the name of the person you spoke to when you called the company.
You will not be liable if you notify your issuer that your cards were lost or stolen before unauthorized charges are made. If your cards are used before you report them missing, the most you can be liable for is $50 per account.
Remember. . . .
- Make sure you understand the terms of a credit card plan before you accept the card. Review the disclosures of terms and fees that must appear on credit-card offers.
- Keep copies of sales slips and promptly compare charges when your bills arrive. Pay bills promptly.
- Protect your credit cards and account numbers to prevent unauthorized use. Draw a line through blank spaces above the total when you sign receipts. Rip up or retain carbons.
- Do not give out your card number over the phone unless you know the business or unless you initiated the call.
- Keep a list of your credit card numbers and the telephone numbers of each card issuer in a safe place in case your cards are lost or stolen.
See Web Site on Fair Credit Billing.
Where to go for Help. . . .
The following federal agencies are responsible for enforcing federal laws that govern credit card transactions. Questions concerning a particular card issuer should be directed to the enforcement agency responsible for that issuer.
| National Banks: Comptroller of the Currency Compliance Management Mail Stop 7-5 Washington D. C. 20219 |
Non-Member Federally Insured Banks: Federal Deposit Insurance Corporation Office of Consumer Programs 550 Seventeenth Street, N.W. Washington, D.C. 20429 |
| Federal Credit Unions: National Credit Union Administration 1776 G St., N. W. Washington D. C. 20456 |
Other Credit Card Issuers: Federal Trade Commission Division of Credit Practices Bureau of Consumer Protection Washington D C 20580 |
Other Information
American Express Company offers free consumer booklets on a variety of credit subjects. To order, contact: American Express Company, P.O. Box 4635, Trenton, NJ 08650-4635. For information about students and credit, you can visit American Express Company.
Bankcard Holders of America (BHA) is a nonprofit consumer organization that provides credit information as well as customized advice on credit problems. You can write BHA, 524 Branch Drive, Salem, VA 24153; (540) 389-5445.
