Credit Cards

Choosing and Using Credit Cards

Chances are you've gotten your share of "pre-approved" credit card offers in the mail, some with low introductory rates and other perks. Many of these solicitations urge you to accept "before the offer expires." Before you accept, shop around to get the best deal.

Credit Card Terms
A credit card is a form of borrowing that often involves charges. Credit terms and conditions affect your overall cost. So it's wise to compare terms and fees before you agree to open a credit or charge card account. The following are some important terms to consider that generally must be disclosed in credit card applications or in solicitations that require no application. You also may want to ask about these terms when you're shopping for a card.

Annual Percentage Rate. The APR is a measure of the cost of credit, expressed as a yearly rate. It also must be disclosed before you become obligated on the account and on your account statements.

The card issuer also must disclose the "periodic rate" - the rate applied to your outstanding balance to figure the finance charge for each billing period.

Some credit card plans allow the issuer to change your APR when interest rates or other economic indicators - called indexes - change. Because the rate change is linked to the index's performance, these plans are called "variable rate" programs. Rate changes raise or lower the finance charge on your account. If you're considering a variable rate card, the issuer must also provide various information that discloses to you:

* that the rate may change; and
* how the rate is determined - which index is used and what additional amount, the "margin," is added to determine your new rate.

At the latest, you also must receive information, before you become obligated on the account, about any limitations on how much and how often your rate may change.

Free Period. Also called a "grace period," a free period lets you avoid finance charges by paying your balance in full before the due date. Knowing whether a card gives you a free period is especially important if you plan to pay your account in full each month. Without a free period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account. If your card includes a free period, the issuer must mail your bill at least 14 days before the due date so you'll have enough time to pay.

Annual Fees. Most issuers charge annual membership or participation fees. They often range from $25 to $50, sometimes up to $100; "gold" or "platinum" cards often charge up to $75 and sometimes up to several hundred dollars.

Transaction Fees and Other Charges. A card may include other costs. Some issuers charge a fee if you use the card to get a cash advance, make a late payment, or exceed your credit limit. Some charge a monthly fee whether or not you use the card.

Balance Computation Method for the Finance Charge. If you don't have a free period, or if you expect to pay for purchases over time, it's important to know what method the issuer uses to calculate your finance charge. This can make a big difference in how much of a finance charge you'll pay - even if the APR and your buying patterns remain relatively constant. See page 4 for examples of how the methods can affect your costs.

Examples of balance computation methods include the following.

Average Daily Balance. This is the most common calculation method. It credits your account from the day payment is received by the issuer. To figure the balance due, the issuer totals the beginning balance for each day in the billing period and subtracts any credits made to your account that day. While new purchases may or may not be added to the balance, depending on your plan, cash advances typically are included. The resulting daily balances are added for the billing cycle. The total is then divided by the number of days in the billing period to get the "average daily balance."

Adjusted Balance. This is usually the most advantageous method for card holders. Your balance is determined by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren't included.

This method gives you until the end of the billing cycle to pay a portion of your balance to avoid the interest charges on that amount. Some creditors exclude prior, unpaid finance charges from the previous balance.

Previous Balance. This is the amount you owed at the end of the previous billing period. Payments, credits and new purchases during the current billing period are not included. Some creditors also exclude unpaid finance charges.

Two-cycle Balances. Issuers sometimes use various methods to calculate your balance that make use of your last two month's account activity. Read your agreement carefully to find out if your issuer uses this approach and, if so, what specific two-cycle method is used.

If you don't understand how your balance is calculated, ask your card issuer. An explanation must also appear on your billing statements.

Other Costs and Features
Credit terms vary among issuers. When shopping for a card, think about how you plan to use it. If you expect to pay your bills in full each month, the annual fee and other charges may be more important than the periodic rate and the APR, if there is a grace period for purchases. However, if you use the cash advance feature, many cards do not permit a grace period for the amounts due - even if they have a grace period for purchases. So, it may still be wise to consider the APR and balance computation method. Also, if you plan to pay for purchases over time, the APR and the balance computation method are definitely major considerations.

You'll probably also want to consider if the credit limit is high enough, how widely the card is accepted, and the plan's services and features. For example, you may be interested in "affinity cards" - all-purpose credit cards sponsored by professional organizations, college alumni associations and some members of the travel industry. An affinity card issuer often donates a portion of the annual fees or charges to the sponsoring organization, or qualifies you for free travel or other bonuses.

Special Delinquency Rates. Some cards with low rates for on-time payments apply a very high APR if you are late a certain number of times in any specified time period. These rates sometimes exceed 20 percent. Information about delinquency rates should be disclosed to you in credit card applications or in solicitations that do not require an application.

Receiving a Credit Card
Federal law prohibits issuers from sending you a card you didn't ask for. However, an issuer can send you a renewal or substitute card without your request. Issuers also may send you an application or a solicitation, or ask you by phone if you want a card - and, if you say yes, they may send you one.

Cardholder Protections
Federal law protects your use of credit cards.

Prompt Credit for Payment. An issuer must credit your account the day payment is received. The exceptions are if the payment is not made according to the creditor's requirements, or the delay in crediting your account won't result in a charge.

To help avoid finance charges, follow the issuer's mailing instructions. Payments sent to the wrong address could delay crediting your account for up to five days. If you misplace your payment envelope, look for the payment address on your billing statement or call the issuer.

Refunds of Credit Balances. When you make a return or pay more than the total balance at present, you can keep the credit on your account or write your issuer for a refund - if it's more than a dollar. A refund must be issued within seven business days of receiving your request. If a credit stays on your account for more than six months, the issuer must make a good faith effort to send you a refund.

Errors on Your Bill. Issuers must follow rules for promptly correcting billing errors. You'll get a statement outlining these rules when you open an account and at least once a year. In fact, many issuers include a summary of these rights on your bills.

If you find a mistake on your bill, you can dispute the charge and withhold payment on that amount while the charge is being investigated. The error might be a charge for the wrong amount, for something you didn't accept, or for an item that wasn't delivered as agreed. Of course, you still have to pay any part of the bill that's not in dispute, including finance and other charges.

If you decide to dispute a charge:

* Write to the creditor at the address indicated on your statement for "billing inquiries." Include your name, address, account number, and a description of the error.
* Send your letter soon. It must reach the creditor within 60 days after the first bill containing the error was mailed to you.

The creditor must acknowledge your complaint in writing within 30 days of receipt, unless the problem has been resolved. At the latest, the dispute must be resolved within two billing cycles, but not more than 90 days.

Unauthorized Charges. If your card is used without your permission, you can be held responsible for up to $50 per card.

If you report the loss before the card is used, you can't be held responsible for any unauthorized charges. If a thief uses your card before you report it missing, the most you'll owe for unauthorized charges is $50.

To minimize your liability, report the loss as soon as possible. Some issuers have 24-hour toll-free telephone numbers to accept emergency information. It's a good idea to follow-up with a letter to the issuer - include your account number, the date you noticed your card missing, and the date you reported the loss.

Disputes about Merchandise or Services. You can dispute charges for unsatisfactory goods or services. To do so, you must:

* have made the purchase in your home state or within 100 miles of your current billing address. The charge must be for more than $50. (These limitations don't apply if the seller also is the card issuer or if a special business relationship exists between the seller and the card issuer.) and,
* first make a good faith effort to resolve the dispute with the seller. No special procedures are required to do so.

If these conditions don't apply, you may want to consider filing an action in small claims court.

Shopping Tips
Keep these tips in mind when looking for a credit or charge card.

* Shop around for the plan that best fits your needs.
* Make sure you understand a plan's terms before you accept the card.
* Hold on to receipts to reconcile charges when your bill arrives.
* Protect your cards and account numbers to prevent unauthorized use. Draw a line through blank spaces on charge slips so the amount can't be changed. Tear up carbons.
* Keep a record - in a safe place separate from your cards - of your account numbers, expiration dates and the phone numbers of each issuer to report a loss quickly.
* Carry only the cards you think you'll use.

For Help and Information
Questions about a particular issuer should be sent to the agency with jurisdiction.

National Banks
Comptroller of the Currency
Compliance Management, Mail Stop 7-5
Washington, DC 20219

State Member Banks of the Reserve System
Consumer and Community Affairs
Federal Reserve Board
20th & C Streets, NW
Washington, DC 20551

Federal Credit Unions
National Credit Union Administration
1776 G Street, NW
Washington, DC 20456

Non-Member Federally Insured Banks
Office of Consumer Programs
Federal Deposit Insurance Corporation
550 Seventeenth Street, NW
Washington, DC 20429

Federally Insured Savings and Loans, and Federally Chartered State Banks
Consumer Affairs Program
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552

Other Credit Card Issuers (includes retail/gasoline companies)
Consumer Response Center
Federal Trade Commission
Washington, DC 20580

Credit, ATM and Debit Cards: What to do if They're Lost or Stolen

Many people find it easy and convenient to use credit cards and ATM or debit cards. The Fair Credit Billing Act (FCBA) and the Electronic Fund Transfer Act (EFTA) offer procedures for you to use if your cards are lost or stolen.

Limiting Your Financial Loss

Report the loss or theft of your credit cards and your ATM or debit cards to the card issuers as quickly as possible. Many companies have toll-free numbers and 24-hour service to deal with such emergencies. It's a good idea to follow up your phone calls with a letter. Include your account number, when you noticed your card was missing, and the date you first reported the loss.

You also may want to check your homeowner's insurance policy to see if it covers your liability for card thefts. If not, some insurance companies will allow you to change your policy to include this protection.

Credit Card Loss or Fraudulent Charges (FCBA). Your maximum liability under federal law for unauthorized use of your credit card is $50. If you report the loss before your credit cards are used, the FCBA says the card issuer cannot hold you responsible for any unauthorized charges. If a thief uses your cards before you report them missing, the most you will owe for unauthorized charges is $50 per card. Also, if the loss involves your credit card number, but not the card itself, you have no liability for unauthorized use.

After the loss, review your billing statements carefully. If they show any unauthorized charges, it's best to send a letter to the card issuer describing each questionable charge. Again, tell the card issuer the date your card was lost or stolen, or when you first noticed unauthorized charges, and when you first reported the problem to them. Be sure to send the letter to the address provided for billing errors. Do not send it with a payment or to the address where you send your payments unless you are directed to do so.

ATM or Debit Card Loss or Fraudulent Transfers (EFTA). Your liability under federal law for unauthorized use of your ATM or debit card depends on how quickly you report the loss. If you report an ATM or debit card missing before it's used without your permission, the EFTA says the card issuer cannot hold you responsible for any unauthorized transfers. If unauthorized use occurs before you report it, your liability under federal law depends on how quickly you report the loss.

For example, if you report the loss within two business days after you realize your card is missing, you will not be responsible for more than $50 for unauthorized use. However, if you don't report the loss within two business days after you discover the loss, you could lose up to $500 because of an unauthorized transfer. You also risk unlimited loss if you fail to report an unauthorized transfer within 60 days after your bank statement containing unauthorized use is mailed to you. That means you could lose all the money in your bank account and the unused portion of your line of credit established for overdrafts. However, for unauthorized transfers involving only your debit card number (not the loss of the card), you are liable only for transfers that occur after 60 days following the mailing of your bank statement containing the unauthorized use and before you report the loss.

If unauthorized transfers show up on your bank statement, report them to the card issuer as quickly as possible. Once you've reported the loss of your ATM or debit card, you cannot be held liable for additional unauthorized transfers that occur after that time.

Protecting Your Cards

The best protections against card fraud are to know where your cards are at all times and to keep them secure. For protection of ATM and debit cards that involve a Personal Identification Number (PIN), keep your PIN a secret. Don't use your address, birthdate, phone or Social Security number as the PIN and do memorize the number.

The following suggestions may help you protect your credit card and your ATM or debit card accounts.

For Credit and ATM or Debit Cards:

* Be cautious about disclosing your account number over the phone unless you know you're dealing with a reputable company.
* Never put your account number on the outside of an envelope or on a postcard.
* Draw a line through blank spaces on charge or debit slips above the total so the amount cannot be changed.
* Don't sign a blank charge or debit slip.
* Tear up carbons and save your receipts to check against your monthly statements.
* Cut up old cards - cutting through the account number - before disposing of them.
* Open monthly statements promptly and compare them with your receipts. Report mistakes or discrepancies as soon as possible to the special address listed on your statement for inquiries. Under the FCBA (credit cards) and the EFTA (ATM or debit cards), the card issuer must investigate errors reported to them within 60 days of the date your statement was mailed to you.
* Keep a record - in a safe place separate from your cards - of your account numbers, expiration dates, and the telephone numbers of each card issuer so you can report a loss quickly.
* Carry only those cards that you anticipate you'll need.

For ATM or debit cards:

* Don't carry your PIN in your wallet or purse or write it on your ATM or debit card.
* Never write your PIN on the outside of a deposit slip, an envelope, or other papers that could be easily lost or seen.
* Carefully check ATM or debit card transactions before you enter the PIN or before you sign the receipt; the funds for this item will be fairly quickly transferred out of your checking or other deposit account.
* Periodically check your account activity. This is particularly important if you bank online. Compare the current balance and recent withdrawals or transfers to those you've recorded, including your current ATM and debit card withdrawals and purchases and your recent checks. If you notice transactions you didn't make, or if your balance has dropped suddenly without activity by you, immediately report the problem to your card issuer. Someone may have co-opted your account information to commit fraud.

Buying a Registration Service

For an annual fee, companies will notify the issuers of your credit card and your ATM or debit card accounts if your card is lost or stolen. This service allows you to make only one phone call to report all card losses rather than calling individual issuers. Most services also will request replacement cards on your behalf.

Purchasing a card registration service may be convenient, but it's not required. The FCBA and the EFTA give you the right to contact your card issuers directly in the event of a loss or suspected unauthorized use.

If you decide to buy a registration service, compare offers. Carefully read the contract to determine the company's obligations and your liability. For example, will the company reimburse you if it fails to notify card issuers promptly once you've called in the loss to the service? If not, you could be liable for unauthorized charges or transfers.

For More Information

The following federal agencies are responsible for enforcing federal laws that govern credit card and ATM or debit card transactions. Questions concerning a particular card issuer should be directed to the enforcement agency responsible for that issuer.

Board of Governors of the Federal Reserve System
Regulates state-chartered banks that are members of the Federal Reserve System, bank holding companies, and branches of foreign banks:
Division of Consumer and Community Affairs, Stop 801
20th and C Streets, NW
Washington, DC 20551
202-452-3693
www.federalreserve.gov

Federal Deposit Insurance Corporation
Regulates state-chartered banks that are not members of the Federal Reserve System:
Division of Compliance and Consumer Affairs
550 17th Street, NW
Washington, DC 20429
877-ASK-FDIC (275-3342) toll-free
www.fdic.gov

National Credit Union Administration
Regulates federally chartered credit unions:
Office of Public and Congressional Affairs
1775 Duke Street
Alexandria, VA 22314-3428
703-518-6330
www.ncua.gov

Office of the Comptroller of the Currency
Regulates banks with "national" in the name or "N.A." after the name:
Office of the Ombudsman
Customer Assistance Group
1301 McKinney Street, Suite 3710
Houston, TX 77010
800-613-6743 toll-free
www.occ.treas.gov

Office of Thrift Supervision
Regulates federal savings and loan associations and federal savings banks:
Consumer Programs
1700 G Street, NW
Washington, DC 20552
800-842-6929 toll-free
www.ots.treas.gov

Federal Trade Commission
Regulates other credit card and debit card issuers:
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
877-FTC-HELP (382-4357) toll-free
www.ftc.gov

Credit and Debit Card Blocking

Have you ever been told you were over your credit card limit, or had your debit card declined, even though you knew you had available credit, or money in your bank account? If this happened shortly after you stayed in a hotel or rented a car, the problem could have been card "blocking."

What's Blocking?
When you use a credit or debit card to check into a hotel or rent a car, the clerk usually contacts the company that issued your card to give an estimated total. If the transaction is approved, your available credit (credit card) or the balance in your bank account (debit card) is reduced by this amount. That's a "block." Some companies also call this placing a "hold" on those amounts.

Here's how it works: Suppose you use a credit or debit card when you check into a $100-a-night hotel for five nights. At least $500 would likely be blocked. In addition, hotels and rental car companies often add anticipated charges for "incidentals" like food, beverages, or gasoline to the blocked amount. These incidental amounts can vary widely among merchants.

If you pay your bill with the same card you used when you checked in, the final charge on your credit card, or final amount on your debit card, probably will replace the block in a day or two. However, if you pay your bill with a different card, or with cash or a check, the company that issued the card you used at check-in might hold the block for up to 15 days after you've checked out. That's because they weren't notified of the final payment and didn't know you paid another way.

Why Blocking Can Be a Problem
Blocking is used to make sure you don't exceed your credit line (credit card) or overdraw your bank account (debit card) before checking out of a hotel or returning a rental car, leaving the merchant unpaid. Blocking is sometimes also used by restaurants for anticipated sizeable bills (like large groups at dinner or a party), by companies cleaning your home, and other businesses to ensure credit or account money will be available to complete payment.

If you're nowhere near your credit limit or don't have a low balance in your bank account, blocking probably won't be a problem. But if you're reaching that point, be careful. Not only can it be embarrassing to have your card declined, it also can be inconvenient, especially if you have an emergency purchase and insufficient credit or money in your bank account. On debit cards, depending on the balance in your bank account, blocking could lead to charges for insufficient funds while the block remains in place.

How to Avoid Blocking
To avoid the aggravation that blocking can cause, follow these tips:

* When you check into a hotel or rent a car - or if a restaurant or other business asks for your card in advance of service - ask if the company is "blocking," how much will be blocked, how the amount is determined, and how long the block remains in place.
* Consider paying hotel, motel, rental car, or other "blocked" bills with the same credit or debit card you used at the beginning of the transaction. Ask the clerk when the prior block will be removed.
* If you pay with a different card, by cash, or by check, remind the clerk you're using a different form of payment and ask them to remove the prior block promptly.
* Ask your current debit card issuer if they permit blocks, for how long, and from what types of merchants. If they do, you may want to consider getting an overdraft line of credit from your bank. Ask about a plan that always automatically covers the overdraft and does not involve a separate bank decision on whether or not to pay it each time. Although you might incur some interest on this plan if you don't pay off the amount fairly quickly, you would not have an overdraft that is not paid. Ask your bank if they offer an overdraft line of credit, how it would work, and how much it costs.

In addition, if you are considering a credit or debit card, shop around. When comparing credit and debit card offers, ask issuers if they permit blocks, for how long, and from what types of merchants. You may want to consider an issuer that uses shorter blocks.

Credit and Divorce

Mary and Bill recently divorced. Their divorce decree stated that Bill would pay the balances on their three joint credit card accounts. Months later, after Bill neglected to pay off these accounts, all three creditors contacted Mary for payment. She referred them to the divorce decree, insisting that she was not responsible for the accounts. The creditors correctly stated that they were not parties to the decree and that Mary was still legally responsible for paying off the couple's joint accounts. Mary later found out that the late payments appeared on her credit report.

If you've recently been through a divorce - or are contemplating one - you may want to look closely at issues involving credit. Understanding the different kinds of credit accounts opened during a marriage may help illuminate the potential benefits - and pitfalls - of each.

There are two types of credit accounts: individual and joint. You can permit authorized persons to use the account with either. When you apply for credit - whether a charge card or a mortgage loan - you'll be asked to select one type.

Individual or Joint Account
Individual Account: Your income, assets, and credit history are considered by the creditor. Whether you are married or single, you alone are responsible for paying off the debt. The account will appear on your credit report, and may appear on the credit report of any "authorized" user. However, if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), you and your spouse may be responsible for debts incurred during the marriage, and the individual debts of one spouse may appear on the credit report of the other.

Advantages/Disadvantages: If you're not employed outside the home, work part-time, or have a low-paying job, it may be difficult to demonstrate a strong financial picture without your spouse's income. But if you open an account in your name and are responsible, no one can negatively affect your credit record.

Joint Account: Your income, financial assets, and credit history - and your spouse's - are considerations for a joint account. No matter who handles the household bills, you and your spouse are responsible for seeing that debts are paid. A creditor who reports the credit history of a joint account to credit bureaus must report it in both names (if the account was opened after June 1, 1977).

Advantages/Disadvantages: An application combining the financial resources of two people may present a stronger case to a creditor who is granting a loan or credit card. But because two people applied together for the credit, each is responsible for the debt. This is true even if a divorce decree assigns separate debt obligations to each spouse. Former spouses who run up bills and don't pay them can hurt their ex-partner's credit histories on jointly-held accounts.

Account "Users"
If you open an individual account, you may authorize another person to use it. If you name your spouse as the authorized user, a creditor who reports the credit history to a credit bureau must report it in your spouse's name as well as in your's (if the account was opened after June 1, 1977). A creditor also may report the credit history in the name of any other authorized user.

Advantages/Disadvantages: User accounts often are opened for convenience. They benefit people who might not qualify for credit on their own, such as students or homemakers. While these people may use the account, you - not they - are contractually liable for paying the debt.

If You Divorce
If you're considering divorce or separation, pay special attention to the status of your credit accounts. If you maintain joint accounts during this time, it's important to make regular payments so your credit record won't suffer. As long as there's an outstanding balance on a joint account, you and your spouse are responsible for it.

If you divorce, you may want to close joint accounts or accounts in which your former spouse was an authorized user. Or ask the creditor to convert these accounts to individual accounts.

By law, a creditor cannot close a joint account because of a change in marital status, but can do so at the request of either spouse. A creditor, however, does not have to change joint accounts to individual accounts. The creditor can require you to reapply for credit on an individual basis and then, based on your new application, extend or deny you credit. In the case of a mortgage or home equity loan, a lender is likely to require refinancing to remove a spouse from the obligation.