What People Should Konw About
Credit cards are probably the best type of convenience that the financial world had offered to the people. It is most often regarded as the most valuable plastic material on earth because of its power to get anyone anything within the purchasing capacity of the credit card they own. However, credit card is not always as fantastic as they seem. There are certain things that people don't know about underneath the irresistibly high credit limits and zero interest rate offers. The fine prints at the back of every application forms are often neglected and people doesn't take the time to carefully read and understand the clauses stipulated in the agreements. Certain agreements are easier to understand, however, a credit card user agreements are quite more complex. It could be that those agreements are designed to be misleading or that they are just difficult to digest for an average individual. This research paper will explore the rules that people should know about credit card agreements. This is because everyone should know what they are getting into and understanding the credit card agreements will help people avoid being burdened with credit card debt due to misuse of the credits. Not properly managing your credit card will lead to penalty fees, a decline in credit score, increased APR's or interest rates and denials from future credits.
Discussion on Offers and Card Types
First of all, people should know the type of cards they have because there are two type of cards namely credit cards and charge cards, but generally they are the same thing the only difference is their charging scheme. Credit cards has a pre-set credit amount, has a revolving credit line and charges are being billed in full, but partial payments are allowed. Charge cards on the other hand has no interest charges, all charges are due in full and no credit limit spending limit. Other type of cards are secured credit cards that are guaranteed by the deposited money in bank account and the spending credit is limited to the amount of money on the bank. Sub-prime credit cards are marketed to people that have lower credit scores. It has a low credit limit paired with high interest rates up to 25% (consumer-action.org, 2010, web). Prepaid cards is the type of card in which an amount has to be loaded into the card account in order to be used. It has no interest rates and spending limits depend on the amount being loaded.
Before getting a credit card, an application process should be completed before issuance. However, there are two types of card offers that determine the card applicant's worthiness, card type to be issued and amount of provided credits including interest rates. Pre-approved offers are given for pre-screened individuals based on their credit history. The Federal law requires card companies that their pre-approved offers have to have a firm offer of credit, which most of the type is the reason that low credit score applicants were denied. Invitation to apply is the other type of credit card offer in which no pre-screening process is being performed. It doesn't also require a firm offer of credit all it needs is to just simply apply. In this type of offer, the type of cards being issued are the ones with low credit limit and higher interest rate.
Before responding to any offer, there are several things that needs to be considered first;
There are instances that the initial offer does not apply to the cardholder. It happens that the initial offers have zero interest for a specified amount of time. However, the fine print (that are most of the time are ignored) has provisions that limit the cardholder's qualification to the initial offers. There is always a clause on offers stating "subject to terms and conditions", some individual oversee the conditions without understanding that the offers may or may not apply.
Upon receiving the card in the mail, the initial step is to call the card issuer and activate the card. Most people does not take time to read the agreements first before calling for activation. The first thing that they find in the mail envelope is the activation letter which states “you have been approved for a credit limit of “UP TO” $XX,XXX”. The important two words that people fail to notice is the words UP and TO. The misconception happens because the excitement is focused on the amount showing in the activation letter. This means the amount indicated in the letter is not the actual amount instead a possible maximum credit limit that cardholders may get. Card applicants will not be able to determine the exact credit limit unless they called customer service and inquire about it.
Another misleading part of the credit card agreement is the introductory rate. If the introductory offer on interest rate is zero percent, it doesn't mean totally interest free the entire time. Introductory is temporary, meaning the zero percent interest will only last for a specific amount of time mostly six months. When people apply for a credit card, the introductory rate should be explained to them together with the offer duration and when the offer will end. This is referred to as the “go to” rate, even if the introductory rate is fixed at zero for example, the APR will still be variable.
People should also know that interest rates change on new transactions after 45 days from initial use of the card. This is called the change-in-terms notice. If there are instances that the cardholder incurred late charges and penalties, there is also a change in the interest rates due to the late payments of or bouncing checks. Once exposed to penalties, interest rates will shoot up to an overwhelming rate. So it is important that cardholders read about penalties and charges.
Opportunities such as transfer balance is also a marketing strategy for most credit card companies. There are companies that offers to transfer the balance upon approval of the application. There is actually a problem with such offer because prior to activation of the card, the cardholder is not aware of his credit limit. Therefore, a possibility that balances being transferred is higher than the approved credit limit. What will happen is that the new card issuer will only transfer a portion of the balance from the old card. The implication of that is there would be a balance left on the old card, which will incur more interest. The new card on the other hand will also incur new interest rates because of the transferred balance. In the end the cardholder was not able to lessen the credit card debt, but doubling the interest charges he is paying before the transfer.
For credit cards with low introductory rate balance transfers and purchases or both would be a good idea. However, when making a payment the cardholder will have to consider making the minimum payment and anything extra on the payment budget should be paid on transactions with higher interest. This is to ensure that the interest rate will not further incur additional charges on the next bill.
For better understanding the offers, it is advisable to call the toll-free number first or visit the company website to inquire before applying. Firsthand information is better than to battle the agreements that have been signed on the onset of the offer.
Discussion on Terms and Conditions
Every credit card has its called "cardholder agreement", it is a legal contract between the card company and the cardholder. A breach and violation from either parties on the agreement provision is punishable by law under civil and trade laws. There are three things that all cardholders should basically know about. Those three information will actually save cardholders from excessive interest rate charges. This is because card companies cannot raise interest rate in the first year of the existing account based on the following reasons;
1. The standard introductory rate offers usually lasts for six months and it ends exactly on the sixth bill cycle.
2. All cardholders has their own variable rate cards, which is the basis of interest charges depending on the cardholder's transsaction, history and account activities.
3. That the cardholder is more than 60 days late with their payment. This means the card companies can no longer impose additional charges when the customer is 60 days late.
After the credit card account reached its first year, some of the terms such as annual fees and interest rates is now subject to change with a 45-days advance notice. During the 45 day period the cardholder may discusss the changes with the card company and seek options. However, the 45- days notice would not be required provided that the cardholder has variable rates that are tied to an index. An example of that is the prime rate which goes up as the index goes up as well. The notice is also not needed as soon as the introductory rate expires (consumer-action.org, 2010, web).
These changes also opens the opportunity for the cardholder to cancel the credit card account and their rights to do so is applied during the 45 day notice and before the changes take effect. If the cardholder is not amenable to the changes, he has the option to close the account and the card company should grant that request. However, the card company also has the right to double the monthly payment on the remaining balance, but the good side of it is that the payment terms can be extended at least for five years. Once the changes on the rate has been imposed and new transaction has been made, the cardholder will get a notice, but it will void his right to cancel the account. When that happens, any request to cancel will still be accommodated, but the terms of cancellation is unfortunately favorable to the card company.
Looking at the fine print may be a daunting task to read and understand. It would be helpful to be familiar with the terms and conditions first in order to fully comprehend everything that are stated in the credit card agreement.
APR (Annual Percantage Rate) – This is the interest rates applied on all transactions made using the credit card, usually expressed as the yearly rate.
Fixed Interest Rates – These are the non-changing APR's, which is only subject to change upon receiving the 45-days notice.
Variable Rates – These are the interest rates that are subject to constant changes based on a set-formula. An example of that is the Prime Rate plus 3% additional. If in case the issued credit card has a variable rate, its APR's are subject to change according to the interest rate movement in the index.
Penalty or Default Rates – Late payment going beyond the due date will normally incur penalty of default rates. This is also applied if the payment checks bounced and credit rating gets worse. Card companies cannot impose new or additional rates on existing balance due for more than 60 days. However, rate changes will be applied only on new transactions.
APR on Cash Advance - One of the features of a credit card is the cash advnce, but interest rates are higher on cash withdrawals from credit card than on a regular transaction.
Daily Period Rate – In order to average the daily rate applied on the APR, the interest rate is being divided by 365 days and the sum would be the daily period rate.
Arbitration – This is a form of dispute resolution. However, arbitration is tied with no rights to appeal clause of the agreement. This means the cardholder may dispute, but resolutions may not be in favor of the cardholder. People should understand that even if the agreement stipulates that the cardholder can make a dispute. It doesn't mean the dispute will be rectified because underneath the dispute the cardholder has no right to make an appeal. The objective of this rule is to prevent anyone from suing the card company or to join a class action lawsuits.
Balance Transfers – This is another credit card feature that allows the cardholder to transfer balance from one card to another. Some card companies impose interest right after the balance has been transferred and the interestswill immediately begin to accrue.
Convenience Checks – It is a type of check that can be used to pay transactions and transfer balance, but the difference is that the funds for the check comes from the card credits.
Grace Period – If the credit card has no outstanding balance, there would be no finance charges that will accrue during the grace period. However, when an outstanding balance reached the overdue date, there will still be a specific amount of time called the grace period before finance charges are applied.
Minimum Monthly Payment – This is the amount that cardholders can pay partially in relation to their total bill balance. Cardholders can adhere to the minimum monthly payment in order to avoid late payments and finance charges.
Knowing the terminologies would enable cardholders to better understand what the credit card agreement is telling them. In addition, cardholders should also be aware of their remaining card credits. This is because in most cases, people with credit cards fail to check their remaining credits in the card and end up maxing-out the credit limit of their credit cards. Once a credit card was maxed out it will incur additional charge called "over-the-limit-fee". Here's a scenario, a man thinks a pack of chewing gum for $20 is too expensive and it's not worth to spend his cash on such item. He chose to buy a dozen pack of soda drink instead for $5 thinking that the sodas are worth buying than the chewing gum. Before the purchase was made he already used up $998 of his card's credits. His credit limit is only $1,000, therefore, he went over-the-limit with a total card expenditure of $1,003. The bill came in the mail and was shocked to see that there is a $27 over-the-limit charge on his bill. Because of the $5 pack of soda he was charged with even higher amount. Therefore, to compute the cost of the soda he purchased it for $32.
Furthermore, the over-the-limit fee is also paired with interest rate of not less than 12% of the total bill balance. A portion of that interest came from the pack of soda that the man purchased. Looking at the scenario, it appears that because of the lack of awareness with the way credit card imposed charges, the credit debt is largely affected. In addition, if the credit cardholder were not able to pay it in full as billed, the balance will accrue more interest charges. On top of that, if the cardholder failed to pay the amount on time it will greatly affect his credit score, limiting the chance for future credits.
The majority of people particularly the cardholders are not aware of the rules regarding charges on their credit card usage, which are generally stipulated in the credit card agreement. There are some that are aware, but certainly does not know the changes that happen to those rules that they aware about. The Credit Card Act of 2009 stated that card companies cannot increase interest rates in the first 12 months that the account was activated. However, exception to the rules are applied and cardholders should also be familiar with the exceptions in order to keep their credit card bill balance financially manageable (see page 6) (Stlouisfed.org, 2010, web).
According to the new regulations, cardholders should tell the card company to stop transactions that will max the credit limit in their credit card. This regulation will protect cardholders from getting charges for finance and over-the-limit fee and any transaction that will take over their credit limit would be denied by the bank. Under the new rule, card companies cannot charge credit card applicants with annual fee of more than 25% of the credit limit upon application. For example, if the credit limit is $1,000 the annual fee should not be more than $250. However, this limitation is not applied to penalties and late charges. Under the law card companies cannot charge the cardholder a fee of more than $25, unless one of the last six payments is late otherwise the fee will go up as much as $35 (Stlouisfed.org, 2010, web).
New rules also stipulate that cardholders under the age of 21 years old must demonstrate ability to make payments and proof of income must be presented as well. In case the card applicant is under 21 years old he must have cosigner or someone that can guarantee payments on the cardholders behalf. Cosigners must also be notified and agreed to any request for increase of credit limit by the cardholder. Card companies sometimes market their credit cards to college students and uses inducements such as free items, cellphone, gift certificates and other items that are appealing to younger generations of potential cardholders. However, the new rule stated that card companies are not allowed to solicit for new cardholders within at least 1,000 feet from the college campus (Stlouisfed.org, 2010, web). With regard to billing, some credit card agreements does not clearly or intentionally omit the billing cycle information from the agreement to push the cardholders to go beyond the due date. This is for the reason that late charges would apply to the bill and the majority of the card companies revenue actually comes from late charges and fees apart from the interest rate. However, the law is clear when it comes to billing cycles and it is mandatory that billing statements should be mailed to the cardholder at least 21 days before the due date.
Huge number of people are burdened with so much credit card debts that is taking a toll on their credit scores. One of the reason that a lot of people are having financial difficulty and struggling to pay their credit card debt is because they are not well informed. As mentioned earlier in the paper, reading the fine print no matter how small they are on the paper will make a lot of difference. Those small prints are the consumer's best weapon against abusive card companies, it would not hurt to analyze everything first before signing a credit card agreement.
Consumer-action.org (2010, October 27). Credit Cards - What You Need To Know. Consumer Action. Retrieved August 14, 2012, from http://www.consumer-action.org/english/articles/credit_cards_what_you_need_to_know/
Stlouisfed.org (2010). Need to Know: New Regulations for Your Debit and Credit Cards. Federal Reserve Bank of St. Louis. Retrieved August 14, 2012, from http://stlouisfed.org/publications/itv/articles/?id=2028