an educational partnership between consumer action and american express credit cards what you need...

An educational partnership between Consumer Action and American Express

Credit Cards

What You Need To

KNOW

© Consumer Action 2010


Purpose of Training

• Most people have credit cards — but do they know the terms of the agreement that they have with their credit card issuers?

• This training will help you understand how credit cards work and that how you use your cards can affect your credit history.


Credit cards

• The average household receives five credit card offers per month in the mail, and more by telephone and the Internet

• This array of choices makes it difficult to:• Sort through offers

• Understand terms & conditions

• Select the right card


Wise credit

• Not managing your credit wisely can lead to:• Increased annual percentage rates (APRs)

• Unnecessary fees

• A decline in your credit

• Denials of future credit


What are credit cards good for?

• Emergencies• Big ticket items• Establishing credit• Safer than cash• More purchasing power• Protection from fraud on the Internet


Common Types of Cards


Credit cards

• Revolving Credit• Credit line can be used up to the credit limit

• Pay charges in full each month, pay just the minimum, or make a partial payment greater than the minimum due

• Available credit goes up and down as purchases and payments are made

• Variety of credit backgrounds acceptable


Charge cards

• Pay all charges in full every month by the due date• Cannot carry a balance

• No balance = no interest

• Some charge cards allow a balance carry-over for specific purchases, such as travel charges

• Need good credit


Sub-prime credit cards

• Marketed to people who have poor credit• Typically have very low lines of credit, large upfront fees

and high interest rates


Card Offers


Types of offers

• Pre-approved • Invitations to apply• Offers come in the mail, by telephone and online

• Instant credit at stores


Pre-approved offers

• Personalized and based on credit history• Federal law requires that pre-approved solicitations

contain a “firm” offer of credit

• The only exception is if consumer has experienced a serious decline in creditworthiness since the offer was made


Invitations

• Ask consumer to apply for a card• Does not require a firm offer of credit

• Intended to interest consumers in applying


Instant credit

• Salespeople often ask you if you want to get the store’s credit card

• Get a discount on purchases• If the shopper’s credit is good, credit is issued

on the spot


Compare basic terms

• Look for a box with:• interest rates

• grace period

• annual fee

• This box is:• required by law

• often headed with the words “Rates and Fees” or “summary of terms”


Look closely

• Credit limits• While the offer of credit may be guaranteed, the actual

credit limit may not be

• Balance transfers• If you don’t know your credit limit, it’s difficult to know if

you can transfer balances from another card


Credit line

• Consumers don’t know when they apply what credit line they will receive• Many offers state “up to” a certain amount (for example:

“up to” $25,000)

• Key words — “up to”• Company can—and often will—give consumer a lower

credit limit


Card Terms and Conditions


Cardholder agreements

• Sent with every new card• Legal contract between consumer and the

card issuer• By using the card, consumer agrees to honor

the terms and conditions in the agreement


Subject to change

• Card terms and conditions are subject to change at any time• Change notices are usually sent by mail, along with the monthly

statement • Consumers should review everything sent by issuer, even if it looks

like junk mail• Notices must be sent at least 45 days before the change takes

effect• New rate will apply only to new transactions unless an intro rate

has expired, a variable rate has changed, you’re more than 60 days late or haven’t paid as agreed under a workout agreement

• If your credit card company is going to make changes in certain fees (but not your APR), it must give you the option to cancel the card before these fee increases take effect.


Keep all paperwork

• Save card terms and conditions in an easily accessible file for easy reference

• When the company updates your cardholder agreement, replace the old copy with the new one


Annual percentage rate (APR)

• Card’s interest charge, expressed as a yearly rate

• The interest rate is the cost of borrowing money from the credit card company

• Your card’s interest rate is usually for purchases — if you withdraw cash you might be charged a higher interest rate


Variable rates

• If card has a variable rate, the APR will change when interest rates go up or down

• Variable interest rates change according to a set formula using an “index” and a “margin”

• The most common index is the Prime Rate published in the business sections of major newspapers and online


Prime Rate

• The interest rate banks charge their most qualified borrowers

• Prime Rate is the “index” most commonly used to set interest rates on variable rate credit cards• Other indexes used include the London Interbank Offering

Rate (LIBOR)

• Indexes are published in the business sections of major newspapers and online


Fixed rates

• If an issuer calls a rate “fixed” the rate can’t change ever, for any reason. So issuers will use terms like “non-variable” for rates that do not vary with the Prime Rate.

• Non-variable rates can change at any time after the first year, or whenever you are more than 60 days past due, with 45 days notice


Default or penalty rates

• Higher interest rates charged for late payments or decline in credit

• Default factors• Late payment

• Bounced check

• You default on another account you have with the same creditor

• Higher rate will apply to new transactions only, unless you are more than 60 days late


Default with other creditors

• Some companies raise your interest if your credit score declines, but they must give you 45 days notice about the change

• This is sometimes called “universal default”


Cash advance APR

• Most cards charge a higher interest rate for cash advances


Credit card checks

• These special checks - “convenience checks” - are linked to credit card account• They can be used to transfer a balance from another card

or to make purchases or payments to companies that do not accept credit cards

• Convenience checks are charged the cash advance interest rate, usually higher than the regular rate, plus a cash advance fee


Grace period

• The time between the close of the billing cycle and the payment due date

• If you do not carry a balance from the last credit card bill, interest will not be charged on purchases if the new bill is paid in full by the due date


Credit Card Billing Statements


Minimum monthly payment

• The lowest amount you are required to pay each month

• Paying just the minimum amount does very little to reduce the amount owed

• Paying more than the minimum helps reduce the amount of interest owed on the card

• Excess payment must be applied to higher-rate balances first


Periodic interest rate

• APR divided by 365 days • The daily periodic rate is used to calculate

your daily and monthly interest charge


Payment due date

• The last day that payment can be accepted without penalty, generally 25-30 days after the close of the billing cycle

• Due dates must fall on the same day every month

• If payment is not received by 5:00 on the due date, a late fee will be charged


Dispute rights

• If you find a mistake on your bill, you can formally dispute the charge

• You do this by notifying the credit card company

• You can dispute charges for• The wrong amount

• Something you didn’t accept

• An item or service that was not delivered


Take a break

Free annual credit reports• www.annualcreditreport.com• Equifax, TransUnion, Experian

• 877-322-8228

http://www.annualcreditreport.com/


Credit Card Fees


Annual fees

• Annual fees are common on charge cards, “rewards” and airline miles credit cards

• Sometimes an annual fee will be applied if you do not make at least a few charges during the year


Annual fee tips

• Consider the overall value of a card when comparing fee and no-fee cards

• For cards with airline miles or other rewards, make sure the card’s benefits and services are worth the price of the fee


Application fees

• Many sub-prime cards — and some secured cards — charge a fee when an account is opened

• Account-opening fees, including an annual or application fee, cannot exceed 25% of the initial credit limit


Application fee tips

• Secured credit cards are generally much better deals than sub-prime credit cards

• You can find secured credit cards that don’t charge application fees


Balance transfer fee

• Charge for transferring a balance from another credit card

• Commonly assessed as a percentage of the transferred amount (for example, 3%)


Balance transfer tips

• When applying for a new card, ask about balance transfer fees

• Most companies don’t charge balance transfer fees to new cardholders for the first month or two


Cash advance fee

• Commonly charged as a percentage of the cash advance (for example, 3%)

• Minimum charges are common• A maximum charge may limit the amount

paid, but these are not as common as minimum charges


Cash advance tips

• Cash advance fees are an expensive way to get cash – not only do you pay the percentage fee, but interest on cash advances begins to accrue immediately

• Instead, use your ATM or debit card to withdraw cash from your checking or savings account at your own bank’s ATMs or point-of-sale terminals


Late fees

• Charged if your payment is late• Payments received on the due date before 5

p.m. cannot be considered late• Your due date must fall on the same day each

month


Late fee tips

• Always pay bills on time• Allow at least seven days for the payment to

reach issuer if using the U.S. Postal Service• Consider online bill pay, pay-by-phone, online

payments at the issuer’s web site, or automatic payments from bank account• Try to avoid waiting until the last minute--you can be

charged a fee if you need to make an expedited payment with the help of a customer service rep


Over credit limit fee

• Charged if you go over your credit limit AND you have given permission to the card issuer to charge a fee if you exceed your credit limit

• Only one over-limit fee allowed per billing cycle

• If you don’t give permission, you don’t get fee AND transactions that would push you over limit are likely to be declined


Credit limit tips

• Know your credit limit• Keep your credit in good shape by accessing

no more than 50% of your credit limit at any time

• Call card issuer in advance when an increase in your credit limit is needed

• Ask if issuer has free e-mail alerts to warn when you are approaching your credit limit


Optional Fee-Based Services &Card Features and Benefits


Optional services

• Most card issuers offer optional services for a fee

• These may include credit protection insurance, identity theft or fraud prevention plans


Your choice

• You do not have to buy optional services• Not buying them will not affect your card

application or change the terms of the card• Before making a decision on whether to purchase optional

services, get detailed information and review the limitations and restrictions of the service


Free benefits

• Zero liability if your card is used to make purchases without your authorization

• Cash rebates or merchandise rewards• Rental car “collision damage waiver” (CDW)

coverage• Buyers’ protection against loss and theft• Extended warranties on items you buy using

your card


About Consumer Action

• www.consumer-action.org• Free educational materials on credit cards and

other personal finance topics• You can get advice and referrals by calling

Consumer Action counselors• 415-777-9635

• 213-624-8327

• TTY: 415-777-9456

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