Information on Consumer Protection
The Consumer Credit Protection
Act of 1968--which launched Truth in Lending--was a landmark piece of
legislation. For the first time, creditors had to state the cost of borrowing
in a common language so that you--the customer--could figure out exactly
what the charges would be, compare costs, and shop around for the credit
deal best for you.
Since 1968, credit protections
have multiplied rapidly. The concepts of "fair" and "equal"
credit have been written into laws that outlaw unfair discrimination in
credit transactions; require that consumers be told the reason when credit
is denied; let borrowers find out about their credit records; and set
up a way to settle billing disputes.
Each law was meant to reduce
the problems and confusion surrounding consumer credit which, as it became
more widely used in our economy, also grew more complex. Together, these
laws set a standard for how individuals are to be treated in their financial
The laws say, for instance:
--that you cannot be turned
down for a credit card just because you're a single woman;
--that you can limit your risk
if a credit card is lost or stolen;
--that you can straighten out
errors in your monthly bill without damage to your credit rating; and
--that you won't find credit
shut off just because you've reached the age of 65.
But, let the buyer be
aware! It is important to know your rights and how to use them.
This document explains how the consumer credit laws can help you shop
for credit, apply for it, keep up your credit standing, and--if need be--complain
about an unfair deal. It explains what you should look for when using
credit and what creditors look for before extending it. It also points
out the laws' solutions to discriminatory practices that have made it
difficult for women and minorities to get credit in the past.
Shopping Is the First Step
You get credit by promising
to pay in the future for something you receive in the present.
Credit is a convenience. It
lets you charge a meal on your credit card, pay for an appliance on the
installment plan, take out a loan to buy a house, or pay for schooling
or vacations. With credit, you can enjoy your purchase when you're lacking
But there are strings attached
to credit too. It usually costs something. And of course what is borrowed
must be paid back.
If you are thinking of borrowing
or opening a credit account, your first step should be to figure out how
much it will cost you and whether you can afford it. Then you should shop
around for the best terms.
What Laws Apply?
Two laws help you compare costs:
TRUTH IN LENDING requires creditors
to give you certain basic information about the cost of buying on credit
or taking out a loan. These "disclosures" can help you shop
around for the best deal.
CONSUMER LEASING disclosures
can help you compare the cost and terms of one lease with another and
with the cost and terms of buying for cash or on credit.
The Finance Charge and Annual
Percentage Rate (APR)
Credit costs vary. By remembering
two terms, you can compare credit prices from different sources. Under
Truth in Lending the creditor must tell you--in writing and before you
sign any agreement--the finance charge and the annual percentage rate.
The finance charge is the total dollar amount you pay to use credit. It includes interest
costs, and other costs, such as service charges and some credit-related
For example, borrowing $100
for a year might cost you $10 in interest. If there were also a service
charge of $1, the finance charge would be $11.
The annual percentage
rate (APR) is the percentage cost (or relative cost) of credit
on a yearly basis. This is your key to comparing costs, regardless of
the amount of credit or how long you have to repay it:
Again, suppose you borrow $100
for one year and pay a finance charge of $10. If you can keep the entire
$100 for the whole year and then pay back $110 at the end of the year,
you are paying an APR of 10 percent. But, if you repay the $100 and finance
charge (a total of $110) in twelve equal monthly installments, you don't
really get to use $100 for the whole year. In fact, you get to use less
and less of that $100 each month. In this case, the $10 charge for credit
amounts to an APR of 18 percent.
All creditors--banks, stores,
car dealers, credit card companies, finance companies--must state the
cost of their credit in terms of the finance charge and the APR. Federal
law does not set interest rates or other credit charges. But it does require
their disclosure so that you can compare credit costs. The law says these
two pieces of information must be shown to you before you sign a credit
contract or before you use a credit card.
Even when you understand the
terms a creditor is offering, it's easy to underestimate the difference
in dollars that different terms can make. Suppose you're buying a $7,500
car. You put $1,500 down and need to borrow $6,000. Compare these three
How do these choices stack
up? This answer depends partly on what you need.
The lowest cost loan is available
from Creditor A.
If you were looking for lower
monthly payments, you could get them by paying the loan off over a period
of time. However, you would have to pay more in total costs. A loan from
Creditor B--also at a 14 percent APR, but for four years--will add about
$488 to your finance charge.
If that four-year loan were
available only from Creditor C, the APR of 15 percent would add another
$145 or so to your finance charges as compared with Creditor B.
Other terms--such as the size
of the down payment--will also make a difference. Be sure to look at all
the terms before you make your choice.
Cost of Open-end Credit
Open-end credit includes bank
and department store credit cards, gasoline company cards, home equity
lines, and check-overdraft accounts that let you write checks for more
than your actual balance with the bank. Open-end credit can be used again
and again, generally until you reach a certain prearranged borrowing limit.
Truth in Lending requires that open-end creditors tell you the terms of
the credit plan so that you can shop and compare the costs involved.
When you're shopping for an
open-end plan, the APR you're told represents only the periodic rate that
you will be charged--figured on a yearly basis. (For instance, a creditor
that charges 1 percent interest each month would quote you an APR of 18
percent.) Annual membership fees, transaction charges, and points, for
example, are listed separately; they are not included in the APR. Keep
this in mind and compare all the costs involved in the plans, not just
Creditors must tell you when
finance charges begin on your account, so you know how much time you have
to pay your bill before a finance charge is added. Creditors may give
you a 25-day grace period, for example, to pay your balance in full before
making you pay a finance charge.
Creditors also must tell you
the method they use to figure the balance on which you pay a finance charge;
the interest rate they charge is applied to this balance to come up with
the finance charge. Creditors use a number of different methods to arrive
at the balance. Study them carefully; they can significantly affect your
Some creditors, for instance,
take the amount you owed at the beginning of the billing cycle, and subtract
any payments you make during that cycle. Purchases are not counted. This
is called the adjusted balance method.
Another is the previous
balance method. Creditors simply use the amount owed at the beginning
of the billing cycle to come up with the finance charge.
Under one of the most common
methods--the average daily balance method--creditors add your
balances for each day in the billing cycle and then divide that total
by the number of days in the cycle. Payments made during the cycle are
subtracted in arriving at the daily amounts, and, depending on the plan,
new purchases may or may not be included. Under another method--the
two cycle average daily balance method--creditors use the average
daily balances for two billing cycles to compute your finance charge.
Again, payments will be taken into account in figuring the balances, but
new purchases may or may not be included.
Be aware that the amount of
the finance charge may vary considerably depending on the method used,
even for the same pattern of purchases and payments.
If you receive a credit card
offer or an application, the creditor must give you information about
the APR and other important terms of the plan at that time. Likewise,
with a home equity plan, information must be given to you with an application.
Truth in Lending does not set
the rates or tell the creditor how to calculate finance charges--it only
requires that the creditor tell you the method that it uses. You should
ask for an explanation of any terms you don't understand.
Leasing Costs and Terms
Leasing gives you temporary
use of property in return for periodic payments. It has become a popular
alternative to buying--under certain circumstances. For instance, you
might consider leasing furniture for an apartment you'll use only for
a year. The Consumer Leasing law requires leasing companies to give you
the facts about the costs and terms of their contracts, to help you decide
whether leasing is a good idea.
The law applies to personal
property leased to you for more than four months for personal, family,
or household use. It covers, for example, long-term rentals of cars, furniture,
and appliances, but not daily car rentals or leases for apartments.
Before you agree to a lease,
the leasing company must give you a written statement of costs, including
the amount of any security deposit, the amount of your monthly payments,
and the amount you must pay for licensing, registration, taxes, and maintenance.
The company must also give you a written statement about terms,
including any insurance you need, any guarantees, information about who
is responsible for servicing the property, any standards for its wear
and tear, and whether or not you have an option to buy the property.
Open-end Leases and Balloon
Your costs will depend on whether
you choose an open-end lease or a closed-end lease. Open-end leases usually
mean lower monthly payments than closed-end leases, but you may owe a
large extra payment--often called a balloon payment--based on the value
of the property when you return it.
Suppose you lease a car under
a three-year open-end lease. The leasing company estimates the car will
be worth $4,000 after three years of normal use. If you bring back the
car in a condition that makes it worth only $3,500, you may owe a balloon
payment of $500.
The leasing company must tell
you whether you may owe a balloon payment and how it will be calculated.
You should also know that:
--you have the right to an
independent appraisal of the property's worth at the end of the lease.
You must pay the appraiser's fee, however.
--a balloon payment is usually
limited to no more than three times the average monthly payment. If your
monthly payments is $200, your balloon payment wouldn't be more than $600--unless,
for example, the property has received more than average wear and tear
(for instance, if you drove a car more than average mileage.)
Closed-end leases usually have
higher monthly payments than open-end leases, but there is no balloon
payment at the end of the lease.
Cost of Settlement on a House
A house is probably the single
largest credit purchase for most consumers--and one of the most complicated.
The Real Estate Settlement Procedures Act, like Truth in Lending, is a
disclosure law. The Act, administered by the Department of Housing and
Urban Development, requires the lender to give you, in advance, certain
information about the costs you will pay when you close the loan.
This event is called settlement
or closing, and the law helps you shop for lower settlement costs. To
find out more about it, write to: Deputy Assistant Secretary for Housing,
Attention: RESPA Enforcement, U.S. Department of Housing and Urban Development,
451 Seventh Street, S.W., Room 5241, Washington, D.C. 20410.
Applying for Credit
When you're ready to apply
for credit, you should know what creditors think is important in deciding
whether you're creditworthy. You should also know what they cannot legally
consider in their decisions.
What Law Applies
THE EQUAL CREDIT OPPORTUNITY
ACT requires that all credit applicants be considered on the basis of
their actual qualifications for credit and not be turned away because
of certain personal characteristics.
What Creditors Look For
The Three C's.
Creditors look for an ability to repay debt and a willingness to do so--and
sometimes for a little extra security to protect their loans. They speak
of the three C's of credit--capacity, character, and collateral.
Capacity. Can you repay the debt? Creditors ask for employment information: your
occupation, how long you've worked, and how much you earn. They also want
to know your expenses: how many dependents you have, whether you pay alimony
or child support, and the amount of your other obligations.
Character. Will you repay the debt? Creditors will look at your credit history: how
much you owe, how often you borrow, whether you pay bills on time, and
whether you live within your means. They also look for signs of stability:
how long you've lived at your present address, whether you own or rent,
and length of your present employment.
Collateral. Is the creditor fully protected if you fail to repay? Creditors want to
know what you may have that could be used to back up or secure your loan,
and what sources you have for repaying debt other than income, such as
savings, investments, or property.
Creditors use different combination
of these facts in reaching their decisions. Some set unusually high standards
and others simply do not make certain kinds of loans. Creditors also use
different kinds of rating systems. Some rely strictly on their own instinct
and experience. Others use a "credit-scoring" or statistical
system to predict whether you're a good credit risk. They assign a certain
number of points to each of the various characteristics that have proved
to be reliable signs that a borrower will repay. Then, they rate you on
And so, different creditors
may reach different conclusions based on the same set of facts. One may
find you an acceptable risk, while another may deny you a loan.
Information the Creditor Can't
The Equal Credit Opportunity
Act does not guarantee that you will get credit. You must still pass the
creditor's tests of creditworthiness. But the creditor must apply these
tests fairly, impartially, and without discriminating against you on any
of the following grounds: age, gender, marital status, race, color, religion,
national origin, because you receive public income such as veterans benefits,
welfare or Social Security, or because you exercise your rights under
Federal credit laws such as filing a billing error notice with a creditor.
This means that a creditor may not use any of those grounds as a reason
--discourage you from applying
for a loan;
--refuse you a loan if you
--lend you money on terms different
from those granted another person with similar income, expenses, credit
history, and collateral.
Age. In the
past, many older persons have complained about being denied credit just
because they were over a certain age. Or when they retired, they often
found their credit suddenly cut off or reduced. So the law is very specific
about how a person's age may be used in credit decisions.
A creditor may ask your age,
but if you're old enough to sign a binding contract (usually 18 or 21
years old depending on state law), a creditor may not:
--turn you down or offer you
less credit just because of your age;
--ignore your retirement income
in rating your application;
--close your credit account
or require you to reapply for it just because you reach a certain age
or retire; or
--deny you credit or close
your account because credit life insurance or other credit-related insurance
is not available to persons your age.
Creditors may "score"
your age in a credit-scoring system, but:
--if you are 62 or older you
must be given at least as many points for age as any person under 62.
Because individuals' financial
situations can change at different ages, the law lets creditors consider
certain information related to age--such as how long until you retire
or how long your income will continue. An older applicant might not qualify
for a large loan with a 5 percent down payment on a risky venture, but
might quality for a smaller loan--with a bigger down payment--secured
by good collateral. Remember that while declining income may be a handicap
if you are older, you can usually offer a solid credit history to your
advantage. The creditor has to look at all the facts and apply the usual
standards of creditworthiness to your particular situation.
Public Assistance. You may not be denied credit just because you receive Social Security
or public assistance (such as Aid to Families with Dependent Children).
But--as is the case with age--certain information related to this source
of income could clearly affect creditworthiness. So, a creditor may consider
such things as:
--how old your dependents are
(because you may lose benefits when they reach a certain age); or
--whether you will continue
to meet the residency requirements for receiving benefits.
This information helps the
creditor determine the likelihood that your public assistance income will
Housing Loans. The Equal Credit Opportunity Act covers your application for a mortgage
or home improvement loan. It bans discrimination because of such characteristics
as your race, color, gender, or because of the race or national origin
of the people in the neighborhood where you live or want to buy your home.
Nor may creditors use any appraisal of the value of the property that
considers the race of the people in the neighborhood.
In addition, you are entitled
to receive a copy of an appraisal report that you paid for in connection
with an application for credit, if you make a written request for the
Discrimination Against Women
Both men and women are protected
from discrimination based on gender or marital status. But many of the
law's provisions were designed to stop particular abuses that generally
made it difficult for women to get credit. For example, the idea that
single women ignore their debts when they marry, or that a woman's income
"doesn't count" because she'll leave work to have children,
now is unlawful in credit transactions.
The general rule is that you
may not be denied credit just because you are a woman, or just because
you are married, single, widowed, divorced, or separated. Here are
some important protections:
Gender and Marital
Status. Usually, creditors may not ask your gender on an application
form (one exception is on a loan to buy or build a home).
You do not have to use Miss,
Mrs., or Ms. with your name on a credit application. But in some cases,
a creditor may ask whether you are married, unmarried, or separated (unmarried
includes single, divorced, and widowed).
Child-bearing Plans. Creditors may not ask about your birth control practices or whether you
plan to have children, and they may not assume anything about those plans.
Income and Alimony. The creditor must count all of your income, even income from part-time
Child support and alimony payments
are a primary source of income for many women. You don't have to disclose
these kinds of income, but if you do creditors must count them.
Telephones. Creditors may not consider whether you have a telephone listing in your
name because this would discriminate against many married women. (You
may be asked if there's a telephone in your home.)
A creditor may consider whether
income is steady and reliable, so be prepared to show that you can count
on uninterrupted income--particularly if the source is alimony payment
or part-time wages.
Your Own Accounts. Many married women used to be turned down when they asked for credit in
their own name. Or, a husband had to co-sign an account--agree to pay
if the wife didn't--even when a woman's own income could easily repay
the loan. Single women couldn't get loans because they were thought to
be somehow less reliable than other applicants. You now have a right to
your own credit, based on your own credit records and earnings. Your own
credit means a separate account or loan in your own name--not a joint
account with your husband or a duplicate card on his account. Here are
--Creditors may not refuse
to open an account just because of your gender or marital status.
--You can choose to use your
first name and maiden name (Mary Smith); your first name and husband's
last (Mary Jones); or a combined last name (Mary Smith-Jones).
--If you're creditworthy, a
creditor may not ask your husband to co-sign your account, with certain
exceptions when property rights are involved.
--Creditors may not ask for
information about your husband or ex-husband when you apply for your own
credit based on your own income--unless that income is alimony, child
support, or separate maintenance payments from your spouse or former spouse.
This last rule, of course,
does not apply if your husband is going to use your account or be responsible
for paying your debts on the account, or if you live in a community property
state. (Community property states are: Arizona, California, Idaho, Louisiana,
Nevada, New Mexico, Texas, Washington, and Wisconsin.)
Change in Marital Status. Married women have sometimes faced severe hardships when cut off from
credit after their husbands died. Single women have had accounts closed
when they married, and married women have had accounts closed after a
divorce. The law says that creditors may not make you reapply for credit
just because you marry or become widowed or divorced. Nor may they close
your account or change the terms of your account on these grounds. There
must be some sign that your creditworthiness has changed. For example,
creditors may ask you to reapply if you relied on your ex-husbands' income
to get credit in the first place.
Setting up your own account
protects you by giving you your own history of how you handle debt, to
rely on if your financial situation changes because you are widowed or
divorced. If you're getting married and plan to take your husband's surname,
write to your creditors and tell them if you want to keep a separate account.
If You're Turned Down
Remember, your gender or race
may not be used to discourage you from applying for a loan. And creditors
may not hold up or otherwise delay your application on those grounds.
Under the Equal Credit Opportunity Act, you must be notified within 30
days after your application has been completed whether your loan has been
approved or not. If credit is denied, this notice must be in writing and
it must explain the specific reasons why you were denied credit or tell
you of your right to ask for an explanation. You have the same rights
if an account you have had is closed.
If you are denied credit, be
sure to find out why. Remember, you may have to ask the creditors for
this explanation. It may be that the creditor thinks you have requested
more money than you can repay on your income. It may be that you have
not been employed or lived long enough in the community. You can discuss
terms with the creditor and ways to improve your creditworthiness.
If you think you have been
discriminated against, cite the law to the lender. If the lender still
says no without a satisfactory explanation, you may contact a Federal
enforcement agency for assistance or bring legal action as described in
the last section of this document.
Building Up a Good Record
On your first attempt to get
credit, you may face a common frustration: sometimes it seems you have
to already have credit to get credit. Some creditors will look only at
your salary and job and the other financial information you put on your
application. But most also want to know about your track record in handling
credit--how reliably you've repaid past debts. They turn to the records
kept by credit bureaus or credit reporting agencies whose business is
to collect and store information about borrowers that is routinely supplied
by many lenders. These records include the amount of credit you have received
and how faithfully you've paid it back. Here are several ways you can
begin to build up a good credit history:
--Open a checking account or
a savings account, or both. These do not begin your credit file, but may
be checked as evidence that you have money and know how to manage it.
Canceled checks can be used to show you pay utility bills or rent regularly,
a sign of reliability.
--Apply for a department store
credit card. Repaying credit card bills on time is a plus in credit histories.
--Ask whether you may deposit
funds with a financial institution to serve as collateral for a credit
card; some institutions will issue a credit card with a credit limit usually
no greater than the amount on deposit.
--If you're new in town, write
for a summary of any credit record kept by a credit bureau in your former
town. (Ask the bank or department store in your old hometown for the name
of the agency it reports to.)
--If you don't qualify on the
basis of your own credit standing, offer to have someone co-sign your
--If you're turned down, find
out why and try to clear up any misunderstandings.
What Laws Apply?
The following laws can help
you start your credit history and keep your record accurate:
THE EQUAL CREDIT OPPORTUNITY
ACT gives women a way to start their own credit history and identity.
THE FAIR CREDIT REPORTING ACT
sets up a procedure for correcting mistakes on your credit record.
Credit Histories for Women
Under the Equal Credit Opportunity
Act, reports to credit bureaus must be made in the names of both husband
and wife if both use an account or are responsible for repaying the debt.
Some women who are divorced or widowed might not have separate credit
histories because in the past credit accounts were listed in their husband's
name only. But they can still benefit from this record. Under the Equal
Credit Opportunity Act, creditors must consider the credit history of
accounts women have held jointly with their husbands. Creditors must also
look at the record of any account held only in the husband's name if a
woman can show it also reflects her own creditworthiness. If the record
is unfavorable--if an ex-husband was a bad credit risk--she can try to
show that the record does not reflect her own reputation. Remember that
a wife may also open her own account to be sure of starting her own credit
Here's an example:
Mary Jones, when married to
John Jones, always paid their credit card bills on time and from their
joint checking account. But the card was issued in John's name, and the
credit bureau kept all records in John's name. Now Mary is a widow and
wants to take out a new card, but she's told she has no credit history.
To benefit from the good credit record already on the books in John's
name, Mary should point out that she handled all accounts properly when
she was married and that bills were paid by checks from their joint checking
Keeping Up Credit Records
Mistakes on your credit record--sometimes
mistaken identities--can cloud your credit future. Your credit rating
is important, so be sure credit bureau records are complete and accurate.
The Fair Credit Reporting Act says that you must be told what's in your
credit file and have any errors corrected.
Negative Information. If a lender refuses you credit because of unfavorable information in your
credit report, you have a right to the name and address of the agency
that keeps your report. Then, you may either request information from
the credit bureau by mail or in person. You will not get an exact copy
of the file, but you will at least learn what's in the report. The law
also says that the credit bureau must help you interpret the data--because
it's raw data that takes experience to analyze. If you're questioning
a credit refusal made within the past 30 days, the bureau is not allowed
to charge a fee for giving you information.
Any error that you find must
be investigated by the credit bureau with the creditor who supplied the
data. The bureau will remove from your credit file any errors the creditor
admits are there. If you disagree with the findings, you can file a short
statement in your record giving your side of the story. Future reports
to creditors must include this statement or a summary of it.
Old Information. Sometimes credit information is too old to give a good picture of your
financial reputation. There is a limit on how long certain kinds of information
may be kept in your file:
--Bankruptcies must be taken
off your credit history after 10 years.
--Suits and judgments, tax
liens, arrest records, and most other kinds of unfavorable information
must be dropped after 7 years.
Your credit record may not
be given to anyone who does not have a legitimate business need for it.
Stores to which you are applying for credit or prospective employers may
examine your record; curious neighbors may not.
In the next chapter, you will
find the steps to take if there's an error on your bill. By following
these steps, you can protect your credit rating.
Other Aspects of Using Credit
The best way to keep up your
credit standing is to repay all debts on time. But there may be complications.
To protect your credit rating, you should learn how to correct mistakes
and misunderstandings that can tangle up your credit accounts.
When there's a snag, first
try to deal directly with the creditor. The credit laws can help you settle
your complaints without a hassle.
What Laws Apply?
THE FAIR CREDIT BILLING ACT
sets up procedures requiring creditors to promptly correct billing mistakes;
allowing you to withhold payments on defective goods; and requiring creditors
to promptly credit your payments.
TRUTH IN LENDING gives you
three days to change your mind about certain credit transactions that
use your home as collateral; it also limits your risk on lost or stolen
Month after month John Jones
was billed for a lawn mower he never ordered and never got. Finally, he
tore up his bill and mailed back the pieces--just to try to explain things
to a person instead of a computer.
There's a more effective, easier
way to straighten out these errors. The Fair Credit Billing Act requires
creditors to correct errors promptly and without damage to your credit
A Case of Error
The law defines a billing error
as any charge:
--for something you didn't
buy or for a purchase made by someone not authorized to use your account;
--That is not properly identified
on your bill or is for an amount different from the actual purchase price
or was entered on a date different from the purchase date; or
--for something that you did
not accept on delivery or that was not delivered according to agreement.
Billing errors also include:
--errors in arithmetic;
--failure to show a payment
or other credit to your account;
--failure to mail the bill
to your current address, if you told the creditor about an address change
at least 20 days before the end of the billing period; or
--a questionable item, or an
item for which you need more information.
In Case of Error
If you think your bill is wrong,
or want more information about it, follow these steps:
- Notify the creditor in writing
within 60 days after the first bill was mailed that showed the error.
Be sure to write to the address the creditor lists for billing inquiries
and to tell the creditor:
--your name and account number;
--that you believe the bill
contains an error and why you believe it is wrong; and
--the date and suspected amount
of the error or the item you want explained.
The Creditor must acknowledge
your letter within 30 days, unless the problem can be resolved within
that time. Within two billing periods--but in no case longer than 90 days--either
your account must be corrected or you must be told why the creditor believes
the bill is correct.
If the creditor made a mistake,
you do not pay any finance charges on the disputed amount. Your account
must be corrected, and you must be sent an explanation of any amount you
If no error is found, the creditor
must send you an explanation of the reasons for the finding and promptly
send a statement of what you owe, which may include any finance charges
that have accumulated and any minimum payments you missed while you were
questioning the bill. You then have the time usually given on your type
of account to pay any balance, but not less than 10 days.
- If you still are not satisfied,
you should notify the creditor in writing within the time allowed to
pay your bill.
Maintaining Your Credit
Rating. A creditor may not threaten your credit rating while
you're resolving a billing dispute.
Once you have written about
a possible error, a creditor must not give out information to other creditors
or credit bureaus that would hurt your credit reputation. And, until your
complaint is answered, the creditor also may not take any action to collect
the disputed amount.
After the creditor has explained
the bill, if you do not pay in the time allowed, you may be reported as
delinquent on the amount in dispute and the creditor may take action to
collect. Even so, you can still disagree in writing. Then the creditor
must report that you have challenged your bill and give you the name and
address of each person who has received information about your account.
When the matter is settled, the creditor must report the outcome to each
person who has received information. Remember that you may also place
your own side of the story in your credit record.
Defective Goods or Services
Your new sofa arrives with
only three legs. You try to return it; no luck. You ask the merchant to
repair or replace it; still no luck. The Fair Credit Billing Act allows
you to withhold payment on any damaged or poor quality goods or services
purchased with a credit card, as long as you have made a real attempt
to solve the problem with the merchant.
This right may be limited if
the card was a bank or travel and entertainment card or any card not
issued by the store where you made your purchase. In such cases,
--must have been for more than
--must have taken place in
your home state or within 100 miles of your home address.
Prompt Credit for Payments
and Refunds for Credit Balances
Some creditors will not charge
a finance charge if you pay your account within a certain period of time.
In this case, it is especially important that you get your bills, and
get credit for paying them, promptly. Check your statements to make sure
your creditor follows these rules:
Prompt Billing. Look at the date on the postmark. If your account is one on which no finance
or other charge is added before a certain due date, then creditors must
mail their statements at least 14 days before payment is due.
Prompt Crediting. Look at the payment date entered on the statement. Creditors must credit
payments on the day they arrive, as long as you pay according to payment
instructions. This means, for example, sending your payment to the address
listed on the bill.
Credit Balances. If a credit balance results on your account (for example, because you
pay more than the amount you owe, or you return a purchase and the purchase
price is credited to your account), the creditor must make a refund to
you. the refund must be made within seven business days after your written
request, or automatically if the credit balance is still in existence
after six months.
Canceling a Mortgage
Truth in Lending gives you
a chance to change your mind on one important kind of transaction--when
you use your home as security for a credit transaction. For example, when
you are financing a major repair or remodeling and use your home as security,
you have three business days, usually after you sign a contract, to think
about the transaction and to cancel it if you wish. The creditor must
give you written notice of your right to cancel, and, if you decide to
cancel, you must notify the creditor in writing within the three-day period.
The creditor must then return all fees paid and cancel the security interest
in your home. No contractor may start work on your home, and no lender
may pay you or the contractor until the three days are up. If you must
have the credit immediately to meet financial emergency, you may give
up your right to cancel by providing a written explanation of the circumstances.
The right to cancel (or right
of rescission) was provided to protect you against hasty decision--or
decisions made under pressure--that might put your home at risk if you
are unable to repay the loan. The law does not apply to a mortgage to
finance the purchase of your home; for that, you commit yourself as soon
as you sign the mortgage contract. And, if you use your home to secure
an open-end credit line--a home equity line, for instance--you have the
right to cancel when you open the account or when your security interest
or credit limit is increased. (In the case of an increase, only the increase
would be canceled.)
Lost or Stolen Credit Cards
If your wallet is stolen, your
greatest cost may be inconvenience, because your liability on lost or
stolen cards is limited under Truth in Lending.
You do not have to pay for any unauthorized charges made after you notify the card
company of loss or theft of your card. So keep a list of your credit card
numbers and notify card issuers immediately if your card is lost or stolen.
The most you will have to pay for unauthorized charges is $50 on each
card--even if someone runs up several hundred dollars worth of charges
before you report a card missing.
It is illegal for card issuers
to send you a credit card unless you ask for or agree to receive one.
However, a card issuer may send, without your requests, a new card to
replace an expiring one.
Electronic Fund Transfers
On his way home last Friday
night, John Jones realized he had no cash for the weekend. The bank was
closed, but John had his bank debit card and the code to use it. He inserted
the card into an automated teller machine outside the front door of the
bank; then, using a number keyboard, he entered his code and pressed the
buttons for a withdrawal of $50. John's cash was dispensed automatically
from the machine, and his bank account was electronically debited for
the $50 cash withdrawal.
John's debit card is just one
way to use electronic fund transfer (EFT) systems that allow payment between
parties by substituting an electronic signal for cash or checks.
Are we heading for checkless
society? Probably not. But a dent in the number of paper checks in the
country's banking system--or a reduction in the rate at which that number
has been growing--is clearly one advantage to electronic banking.
Today, the cost of moving checks
throughout the banking system is estimated to be approximately 80 cents
per check, including the costs of paper, printing, and mailing. Moreover,
checks--except your own check presented at your own bank--take time to
cash: time for delivery, endorsement, presentation to another person's
bank, and winding through various stations in the check clearing system.
Technology now can lower the costs of the payment mechanism and make it
more efficient and convenient by reducing paperwork.
EFT in Operation
The national payment mechanism
moves money between accounts in a fast, paperless way. These are some
examples of EFT terms in operation:
Automated Teller Machines(ATMs). Consumers can do their banking without the assistance of a teller, as
John Jones did to get cash, or to make deposits, pay bills, or transfer
funds from one account to another electronically. These machines are used
with a debit or EFT card and a code, which is often called a personal
identification number or "PIN."
Transactions. Some EFT cards can be used when shopping to allow
the transfer of funds from the consumer's account to the merchant's. To
pay for a purchase, the consumer presents an EFT card instead of a check
or cash. Money is taken out of the consumer's account and put into the
merchant's account electronically.
Preauthorized Transfers. This is a method of automatically depositing to or withdrawing funds from
an individual's account, when the account holder authorizes the bank or
a third party (such as an employer) to do so. For example, consumers can
authorize direct electronic deposit of wages, Social Security or dividend
payments to their accounts. Or, they can authorize financial institutions
to make regular, ongoing payments of insurance, mortgage, utility or other
Telephone Transfers. Consumers can transfer funds from one account to another--from savings
to checking, for example--or can order payment of specific bills by phone.
What Law Applies?
THE ELECTRONIC FUND TRANSFER
ACT gives consumers answers to several basic questions about using EFT
A check is a piece of paper
with information that authorizes a bank to withdraw a certain amount of
money from one person's account and pay that amount to another person.
Most consumer questions center on the fact that EFT systems transmit the
information without the paper. Thus, they ask:
--What record--what evidence--will
I have of my transactions?
--How easily will I be able
to correct errors?
--What if someone steals money
from my account?
--What about solicitations?
--Do I have to use EFT services?
Here are the answers the EFT
Act gives to consumer questions about these systems.
What record Will I Have of
A canceled check is permanent
proof that a payment has been made. Is proof of payment available with
The answer is yes. If you use
an ATM to withdraw money or make deposits, or a point-of-sale terminal
to pay for a purchase, you can get a written receipt--much like the sales
receipt you get with a cash purchase--showing the amount of the transfer,
the date it was made, and other information. This receipt is your record
of transfers initiated at an electronic terminal.
Your periodic bank statement
must also show all electronic transfers to and from your account, including
those made with debit cards, by a Preauthorized arrangement, or under
a telephone transfer plan. It will also name the party to whom payment
has been made and show any fees for EFT services (or the total amount
charged for account maintenance) and your opening and closing balances.
Your monthly statement is proof
of payment to another person, your record for tax or other purposes, and
your way of checking and reconciling EFT transactions with your bank balance.
How Easily Will I Be Able
to Correct Errors?
The way to report errors is
somewhat different with EFT services than it is with credit cards. But,
as with credit cards, financial institutions must investigate and correct
promptly any EFT errors you report.
If you believe there has been
an error in an electronic fund transfer relating to your account:
1. Write or call your financial
institution immediately if possible, but no later than 60 days from the
date the first statement that you think shows an error was mailed to you.
Give your name and account number and explain why you believe there is
an error, what kind of error, and the dollar amount and date in question.
If you call, you may be asked to send this information in writing within
10 business days.
2. The financial institution
must promptly investigate an error and resolve it within 45 days. However,
if the financial institution takes longer than 10 business days to complete
its investigation, generally it must put back into your account the amount
in question while it finishes the investigation. (The time periods are
longer for POS debit card transactions and for any EFT transaction initiated
outside the United States.) In the meantime, you will have full use of
the funds in question.
3. The financial institution
must notify you of the results of its investigation. If there was
an error, the institution must correct it promptly--for example,
by making a recredit final.
If it finds no error, the financial institution must explain in writing why it believes no error
occurred and let you know that it has deducted any amount recredited during
the investigation. You may ask for copies of documents relied on in the
What About Loss or Theft?
It's important to be aware
of the potential risk in using an EFT card, which differs from the risk
on a credit card.
On lost or stolen credit cards,
your loss is limited to $50 per card. On an EFT card, your liability for
an unauthorized withdrawal can vary:
--Your loss is limited to $50 if you notify the financial institution within two business days
after learning of loss or theft of your card or code.
--But, you could lose as much
as $500 if you do not tell the card issuer within two business days after
learning of the loss or theft.
--If you do not report an unauthorized
transfer that appears on your statement within 60 days after the statement
is mailed to you, you risk unlimited loss on transfers made after
the 60-day period. That means you could lose all the money in your account
plus your maximum overdraft line of credit.
On Monday, John's debit card
and secret code were stolen. On Tuesday, the thief withdrew $250, all
the money John had in his checking account. Five days later, the thief
withdrew another $500, triggering John's overdraft line of credit. John
did not realize his card was stolen until he received a statement from
the bank, showing withdrawals of $750 he did not make. He called the bank
right away. John's liability is $50.
Now suppose that when John
got his bank statement he didn't look at it and didn't call the bank.
Seventy days after the statement was mailed to John, the thief withdrew
another $1,000, reaching the limit on John's line of credit. In this case,
John would be liable for $1,050 ($50 for transfers before the end of the
60 days; $1,000 for transfers made more than 60 days after the statement
What About Solicitations?
A financial institution may
send you an EFT card that is VALID FOR USE only if you ask for one, or
to replace or renew an expiring card. The financial institution must also
give you the following information about your rights and responsibilities:
--A notice of your liability
in case the card is lost or stolen;
--A telephone number for reporting
loss or theft of the card or an unauthorized transfer;
--A description of its error
--The kinds of electronic fund
transfers you may make and any limits on the frequency or dollar amounts
of such transfers;
--Any charge by the institution
for using EFT services;
--Your right to receive records
of electronic fund transfers;
--How to stop payment of a
--The financial institution's
liability to you for any failure to make or to stop transfers; and
--The conditions under which
a financial institution will give information to third parties about your
Generally, you must also get
advance notice of any change in the account that would increase your costs
or liability, or limit transfers.
A financial institution may
send you a card you did not request only if the card is NOT VALID FOR
USE. An "unsolicited" card can be validated only at your request
and only after the institution makes sure that you are the person whose
name is on the card. It must also be sent with instructions on how to
dispose of an unwanted card.
Do I Have to Use EFT?
The EFT Act forbids a creditor
from requiring you to repay a loan or other credit by EFT, except in the
case of overdraft checking plans. And, although your employer or a government
agency can require you to receive your salary or a government benefit
by electronic transfer, you have the right to choose the financial institution
that will receive your funds.
Special Questions About Preauthorized
Q. How will I know
a preauthorized credit has been made?
A. There are various ways you
may be notified. Notice may be given by your employer (or whoever is sending
the funds) that the deposit has been sent to your financial institution
may provide notice when it has received the credit or will send you a
notice only when it has not received the funds. Financial institutions
also have the option of giving you a telephone number you can call to
check on a preauthorized credit.
Q. If the payments
I preauthorize vary in amount from month to month, how will I know how
much will be transferred out of my account?
A. You have the right to be
notified of all varying payments at least 10 days in advance. Or, you
may choose to specify a range of amounts and to be told only when a transfer
falls outside that range. You may also choose to be told only when a transfer
differs by a certain amount from the previous payment to the same company.
Q. Do the EFT Act protections
apply to all preauthorized plans?
A. No. They do not apply to
automatic transfers from your account to the institution that holds your
account or vice versa. For example, they do not apply to automatic payments
made on a mortgage held by the financial institution where you have your
EFT account. The EFT Act also does not apply to automatic transfers among
your accounts at one financial institution.
Complaining to Federal Enforcement
First try to solve your problem
directly with a creditor. Only if that fails should you bring more formal
complaint procedures. Here's the way to file a complaint with the Federal
agencies responsible for carrying out consumer credit protection laws.
Complaints About Banks. If you have a complaint about a bank in connection with any of the Federal
credit laws--or if you think any part of your business with a bank has
been handled in an unfair or deceptive way--you may get advice and help
from the Federal Reserve Bank of Chicago or St. Louis. The practice you
complain about does not have to be covered by Federal law. Furthermore,
you don't have to be a customer of the bank to file a complaint.
You should submit your complaint--in
writing whenever possible--to the Division of Consumer and Community Affairs,
Board of Governors of the Federal Reserve System, Washington, D.C. 20551,
or to the Reserve Bank nearest you. Be sure to describe the bank practice
you are complaining about and give the name and address of the bank involved.
The Federal Reserve will write
back within 15 days--sometimes with an answer, sometimes telling you that
more time is needed to handle your complaint. The additional time is required
when complex issues are involved or when the complaint will be investigated
by a Federal Reserve Bank. When this is the case, the Federal Reserve
will try to keep you informed about the progress being made.
The Board supervises only state-chartered
banks that are members of the Federal Reserve System. It will refer complaints
about other institutions to the appropriate Federal regulatory agency
and let you know where your complaint has been referred.
Complaints About Other
Institutions. Many financial institutions and businesses other
than banks do not handle individual complaints; however, they will use
information about your credit experiences to help enforce the credit laws.
Penalties Under the Laws
You may also take legal action
against a creditor. If you decide to bring a lawsuit, here are the penalties
a creditor must pay if you win.
Truth in Lending and
Consumer Leasing Acts. If any creditor fails to disclose information
required under these Acts, or gives inaccurate information, or does not
comply with the rules about credit cards or the right to cancel certain
home-secured loans, you as an individual may sue for actual damages--any
money loss you suffer. In addition, you can sue for twice the finance
charge in the case of certain credit disclosures, or, if a lease is concerned
25% of total monthly payments. In either case, the least the court may
award you if you win is $100, and the most is $1,000. In any lawsuit that
you win, you are entitled to reimbursement for court cost and attorney's
Class action suits are also
permitted. A class action suit is one filed on behalf of a group of people
with similar claims.
Equal Credit Opportunity
Act. If you think you can prove that a creditor has discriminated
against you for any reason prohibited by the Act, you as an individual
may sue for actual damages plus punitive damages--that is, damages for
the fact that the law has been violated--of up to $10,000. In a successful
lawsuit, the court will award you court costs and a reasonable amount
for attorney's fees. Class action suits are also permitted.
Fair Credit Billing
Act. A creditor who breaks the rules for the correction of billing
errors automatically loses the amount owed on the item in question and
any finance charges on it, up to a combined total of $50--even if the
bill was correct. You as an individual may also sue for actual damages
plus twice the amount of any finance charges, but in any case not less
than $100 nor more than $1,000. You are also entitled to court costs and
attorney's fees in a successful lawsuit. Class action suits are also permitted.
Fair Credit Reporting
Act. You may sue any credit reporting agency or creditor for
breaking the rules about who may see your credit records or for not correcting
errors in your file. Again, you are entitled to actual damages, plus punitive
damages that the court may allow if the violation is proved to have been
intentional. In any successful lawsuit, you will also be awarded court
costs and attorney's fees. A person who obtains a credit report without
proper authorization--or an employee of a credit reporting agency who
gives a credit report to unauthorized persons--may be fined up to $5,000
or imprisoned for one year, or both.
Electronic Fund Transfer
Act. If a financial institution does not follow the provisions
of the EFT Act, you may sue for actual damages (or in certain cases when
the institution fails to correct an error or recredit an account, for
three times actual damages) plus punitive damages of not less than $100
nor more than $1,000. You are also entitled to court costs and attorney's
fees in a successful lawsuit. Class action suits are also permitted.
If an institution fails to
make an electronic fund transfer, or to stop payment of a preauthorized
transfer when properly instructed by you to do so, you may sue for all
damages that result from the failure.
Annual Percentage Rate(APR)--The
cost of credit as a yearly rate.
charge for estimating the value of property offered as security.
that can be used to repay debt, such as stocks and bonds or a car.
Automated Teller Machines(ATMs)--Electronic
terminals located on bank premises or elsewhere, through which customers
of financial institutions may make deposits, withdrawals, or other transactions
as they would through a bank teller.
large extra payment that may be charged at the end of a loan or lease.
mistake in your monthly statement as defined by the Fair Credit Billing
with your institution to find out what days it counts as business days
under the Truth in Lending and Electronic Fund Transfer Acts.
offered to support a loan and subject to seizure if you default.
person who signs your loan and assumes equal responsibility for it.
right granted by a creditor to pay in the future in order to buy or borrow
in the present; a sum of money due a person or business.
agency that keeps your credit record.
card, plate, or coupon book used from time to time or over and over again
to borrow money or buy goods or services on credit.
record of how you've borrowed and repaid debts.
person or business from whom you borrow or to whom you owe money.
life, or accident insurance designed to pay the outstanding balance of
Credit Scoring System--A
statistical system used to rate credit applicants according to various
characteristics relevant to creditworthiness.
and future ability to repay debts.
Debit Card(EFT Card)--A
plastic card, looks similar to a credit card, that consumers may use to
make purchases, withdrawals, or other types of electronic fund transfers.
to repay a loan or otherwise meet the terms of your credit agreement.
that must be given to consumers about their financial dealings.
defined in the Equal Credit Opportunity Act, a person 62 or older.
Electronic Fund Transfer(EFT)Systems--A
variety of systems and technologies for transferring funds electronically
rather than by check.
total dollar amount credit will cost.
Home Equity Line of
Credit--A form of open-end credit in which the home serves as
credit account held by two or more people so that all can use the account
and all assume legal responsibility to repay.
payment made later than agreed upon in a credit contract and on which
additional charges may be imposed.
person who signs a lease to get temporary use of property.
company that provides temporary use of property usually in return for
Liability on an Account--Legal
responsibility to repay debt.
line of credit that may be used over and over again, including credit
cards, overdraft credit accounts, and home equity lines.
lease which may involve a balloon payment based on the value of the property
when it is returned.
line of credit that allows you to write checks or draw funds by means
of an EFT card for more than your actual balance, with an interest charge
on the overdraft.
method by which consumers can pay for purchases by having their deposit
accounts debited electronically without the use of checks.
Points and Origination
Fees--Points are finance charges paid at the beginning of a mortgage
in addition to monthly interest. One point equals one percent of the loan
amount. An origination fee covers the lender's work in preparing your
awarded by court above actual damages as punishment for a violation of
cancellation or "unwinding" of a contract.
pledged to the creditor in case of a default on a loan
creditor's right to take property or a portion of property offered as
component of some finance charges, such as the fee for triggering an overdraft
checking account into use.
* Courtesy of The Board of
Governors of the Federal Reserve System