Credit Cards
What You Need To
KNOW
© Consumer Action 2010
An educational partnership between Consumer Action and American Express
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.
An educational partnership between Consumer Action and American Express
Objectives
• Understand the types of cards available
• Sort through card offers
• Compare terms and conditions
• Avoid penalty rates and fees
• Find more information and assistance
An educational partnership between Consumer Action and American Express
Credit cards
• The average household receives five
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credit card offers per month in the mail,
and more by telephone and the Internet
This array of choices makes it difficult to:
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Sort through offers
Understand terms & conditions
Select the right card
An educational partnership between Consumer Action and American Express
Wise credit
• Not managing your credit wisely can lead
to:
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Increased annual percentage rates (APRs)
Unnecessary fees
A decline in your credit
Denials of future credit
An educational partnership between Consumer Action and American Express
Topics covered
• Types of credit cards
• Card offers
• Card terms and conditions
• Credit card billing statements
• Using credit cards
• Card fees
• Optional services and card benefits
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What are credit
cards good for?
• Emergencies
• Big ticket items
• Establishing credit
• Safer than cash
• More purchasing power
• Protection from fraud on the Internet
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Types of Cards
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Credit cards
• Revolving Credit
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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
An educational partnership between Consumer Action and American Express
Charge cards
• Pay all charges in full every month by the
due date
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Cannot carry a balance
No balance = no interest
Some charge cards allow a balance carry-over for
specific purchases, such as travel charges
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Secured credit
cards
• Guaranteed by money deposited in an
account
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Credit limit usually equals the amount of the deposit
Can be used by people with credit problems to
reestablish good credit
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Sub-prime credit
cards
• Marketed to people who have poor credit
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Typically have very low lines of credit, large upfront
fees and high interest rates
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Prepaid cards
• Also called stored value cards
• These are used by
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retailers as gift cards
travelers as a safe way to get funds on the road
parents who want to give their kids the convenience
of a credit card without the risk
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Card Offers
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Types of offers
• Pre-approved
• Invitations to apply
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Offers come in the mail, by telephone and online
• Instant credit at stores
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Pre-approved
offers
• Personalized and based on credit history
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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
An educational partnership between Consumer Action and American Express
Invitations
• Ask consumer to apply for a card
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Does not require a firm offer of credit
Intended to interest consumers in applying
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Instant credit
• Salespeople often ask you if you want to
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get the store’s credit card
Get a discount on purchases
If the shopper’s credit is good, credit is
issued on the spot
An educational partnership between Consumer Action and American Express
Compare basic
terms
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Look for a box with:
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interest rates
grace period
annual fee
This box is:
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required by law
often headed with the words “Rates and Fees” or
“summary of terms”
An educational partnership between Consumer Action and American Express
Look closely
• Credit limits
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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
An educational partnership between Consumer Action and American Express
Credit line
• Consumers don’t know when they apply
what credit line they will receive
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Many offers state “up to” a certain amount (for
example: “up to” $25,000)
• Key words — “up to”
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Company can—and often will—give consumer a lower
credit limit
An educational partnership between Consumer Action and American Express
Balance transfers
• Many offers include the opportunity to
transfer a balance from one card to
another without a fee
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Consumer should ask if this is a limited time offer
Transfer balance after receiving card
• If the balance transferred is higher than the new credit
limit, the company may only transfer a portion of the
balance, or may decline the whole transfer, leaving a
balance on the old card
An educational partnership between Consumer Action and American Express
Card Terms and
Conditions
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Cardholder
agreements
• Sent with every new card
• Legal contract between consumer and the
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card issuer
By using the card, consumer agrees to
honor the terms and conditions in the
agreement
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Subject to change
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Card terms and conditions are subject to change at
any time
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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.
An educational partnership between Consumer Action and American Express
Keep all paperwork
• Save card terms and conditions in an
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easily accessible file for easy reference
When the company updates your
cardholder agreement, replace the old
copy with the new one
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Annual percentage
rate (APR)
• Card’s interest charge, expressed as a
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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
An educational partnership between Consumer Action and American Express
Variable rates
• If card has a variable rate, the APR will
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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
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Prime Rate
• The interest rate banks charge their most
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qualified borrowers
Prime Rate is the “index” most commonly
used to set interest rates on variable rate
credit cards
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Other indexes used include the London Interbank
Offering Rate (LIBOR)
Indexes are published in the business sections of
major newspapers and online
An educational partnership between Consumer Action and American Express
Fixed rates
• If an issuer calls a rate “fixed” the rate
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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
An educational partnership between Consumer Action and American Express
Default or penalty
rates
• Higher interest rates charged for late
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payments or decline in credit
Default factors
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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
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Default with other
creditors
• Some companies raise your interest if your
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credit score declines, but they must give
you 45 days notice about the change
This is sometimes called “universal
default”
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Cash advance APR
• Most cards charge a higher interest rate
for cash advances
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Credit card checks
• These special checks - “convenience
checks” - are linked to credit card account
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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
An educational partnership between Consumer Action and American Express
Grace period
• The time between the close of the billing
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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
An educational partnership between Consumer Action and American Express
Credit Card Billing
Statements
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Minimum monthly
payment
• The lowest amount you are required to pay
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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
An educational partnership between Consumer Action and American Express
Periodic interest
rate
• APR divided by 365 days
• The daily periodic rate is used to calculate
your daily and monthly interest charge
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Payment due date
• The last day that payment can be
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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
An educational partnership between Consumer Action and American Express
Dispute rights
• If you find a mistake on your bill, you can
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formally dispute the charge
You do this by notifying the credit card
company
You can dispute charges for
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The wrong amount
Something you didn’t accept
An item or service that was not delivered
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Take a break
Free annual credit reports
• www.annualcreditreport.com
• 877-322-8228
An educational partnership between Consumer Action and American Express
Credit Card Fees
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Annual fees
• Annual fees are common on charge cards,
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“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
An educational partnership between Consumer Action and American Express
Annual fee tips
• Consider the overall value of a card when
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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
An educational partnership between Consumer Action and American Express
Application fees
• Many sub-prime cards — and some
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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
An educational partnership between Consumer Action and American Express
Application fee tips
• Secured credit cards are generally much
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better deals than sub-prime credit cards
You can find secured credit cards that
don’t charge application fees
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Balance transfer
fee
• Charge for transferring a balance from
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another credit card
Commonly assessed as a percentage of
the transferred amount (for example, 3%)
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Balance transfer
tips
• When applying for a new card, ask about
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balance transfer fees
Most companies don’t charge balance
transfer fees to new cardholders for the
first month or two
An educational partnership between Consumer Action and American Express
Cash advance fee
• Commonly charged as a percentage of the
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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
An educational partnership between Consumer Action and American Express
Cash advance tips
• Cash advance fees are an expensive way
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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
An educational partnership between Consumer Action and American Express
Currency
conversion fee
• Fees charged for purchases made
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overseas, or purchases made from
companies based outside the U.S.
Also called a foreign exchange fee or
surcharge
Fees vary by issuer
An educational partnership between Consumer Action and American Express
Currency
conversion fees tip
• Before traveling outside of the U.S., shop
around to find a card with a low, or no,
currency conversion fee
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Late fees
• Charged if your payment is late
• Payments received on the due date before
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5 p.m. cannot be considered late
Your due date must fall on the same day
each month
An educational partnership between Consumer Action and American Express
Late fee tips
• Always pay bills on time
• Allow at least seven days for the payment
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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
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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
An educational partnership between Consumer Action and American Express
Over credit limit
fee
• Charged if you go over your credit limit
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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
An educational partnership between Consumer Action and American Express
Credit limit tips
• Know your credit limit
• Keep your credit in good shape by
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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
An educational partnership between Consumer Action and American Express
Optional Fee-Based
Services &
Card Features and
Benefits
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Optional services
• Most card issuers offer optional services
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for a fee
These may include credit protection
insurance, identity theft or fraud
prevention plans
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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
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Before making a decision on whether to purchase
optional services, get detailed information and review
the limitations and restrictions of the service
An educational partnership between Consumer Action and American Express
Free benefits
• Zero liability if your card is used to make
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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
An educational partnership between Consumer Action and American Express
Common fee-based
services
• Credit protection services
• ID theft monitoring services
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Credit protection
insurance
• Makes your loan payments if you die,
•
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become ill or unemployed
Coverage is quite expensive
There are significant limitations
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ID theft monitoring
services
• Credit monitoring companies charge a
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yearly fee to check your credit report
Alerts you if information in your report
changes, such as reviews by potential
creditors or new accounts
You can check your credit report yourself
for free
An educational partnership between Consumer Action and American Express
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
213-624-4631
TTY: 415-777-9456
An educational partnership between Consumer Action and American Express