Credit cards seem fairly straightforward. You make a purchase, swipe your card, and the bill comes once a month. Well, it’s really a bit more complicated than that, especially since the rules keep changing. As we’ve said in previous episodes, “you pay for what you don’t know,” and that’s certainly true in the fast-paced world of consumer borrowing. So if you haven’t been paying attention lately, I’m here to help you avoid paying the hard way later on.
Almost every state has established a maximum interest rate that a creditor can charge. Most of these are low; however, a national bank can choose to follow the laws of the state that it designates as its headquarters, and in some cases, where it only has branches. Not surprisingly, the states most often chosen are those that have no interest rate caps, meaning the creditor can charge any interest rate they choose. How bad could it be? In some countries I’ve seen credit cards with a 65% interest rate. That’s crazy, but so are 29.9% rates, which is the common penalty rate in the U.S.these days. So what do you need to know to protect yourself and your money?
When you sign up for a credit card, your interest rate is protected for your first year, or less if you’ve received a promotional rate. This protection was a result of the Credit Card Accountability, Responsibility and Disclosure Act, or CARD Act of 2009.
You also have some protections when it comes to late payments. First, let’s establish what constitutes a late payment. Your payment is late if your creditor receives it after the statement due date. That means your credit card issuer could charge a late fee; however, that doesn’t mean your credit will be impacted. Your creditor can’t report a late payment to any of the credit bureaus until a payment is made more than 30 days past the due date. If your payment is received 60 days past the due date, the CARD Act protections I mentioned will disappear, and your interest rate could increase.
When it comes to rate increases, there are two things to remember. First, any interest rate increase you receive will apply only to new charges. Your balance at the time of the increase will be charged at your previous rate. Also, your credit card company must give you 45 days advance notice to accept the increase. If you refuse it, chances are your card will be closed. It’s possible to negotiate to keep your previous interest rate, and if you’re successful, be sure to get it in writing. If your creditor challenges your refusal, the CARD Act stipulates that you have at least five years to pay off your balance under the old rate.
The CARD Act also has a provision that allows your rate to decrease if you’ve shown improvement in your credit management. Under the Act, your issuer must review interest rate increases after six months. If you’ve made your payments on time during that period, the issuer can reset the APR to your pre-penalty rate.
It’s also important to consider some of the unique protections that come with using a credit card. With the increase in online shopping and identity theft, some people have begun using their debit cards in place of their credit cards, but there are several reasons why this isn’t advisable. You see, the maximum liability for unauthorized purchases on a stolen or lost credit card is $50 under federal law, though many issuers offer zero liability. If the loss involves just your credit card number, then you have no liability under the law. In addition, if you buy an item with your credit card and it proves to be defective or is damaged during shipping, etc., your credit card issuer becomes your ally as you work to get satisfaction from the merchant.
Now, if someone seals your debit card information, and it’s attached to one of your bank accounts, you could be in for a world of hurt. Despite the fact that debit cards operate similarly to credit cards, they often lack the same protections. It can take you months or years to recover your funds, if at all. If you choose to use your debit card, make sure you choose the credit option when paying so you can receive a paper copy of the transaction that contains your signature. If the thief doesn’t know your pin number, they’ll have to do the same. This will make it easier to prove your claim. Until next time, I’m Thomas Fox for Cambridge Credit Counseling.