One of the many conveniences a consumer can enjoy in today’s world is the different ways they can pay for purchases. Digital banking makes it simpler to pay for services and do all other financial transactions. Before people could pay for products and services online, there were credit cards, which remain to be a reliable payment method today.
Credit cards are a flexible and secure means of payment. Governments have laws that protect every credit card holder and business that accept them as a payment method, outlining its use and serving as a manual for the credit card policies of businesses.
A cardholder should know how to use it wisely to maximize credit card usage. So having a credit card isn’t just about having healthy spending habits but also knowing how it works and other important stuff about owning one.
Although you can obtain a credit card from different sources, many things cover the general knowledge about how it works. Here’s a guide discussing things a long-time credit cardholder may not know and things a first-time cardholder should know.
How a credit card works
A credit card is tied to a credit account with a bank. When you use it, you’re borrowing money from the bank that issued the credit card.
It allows you to spend money up to a pre-set limit called a credit limit. Then, each month, a bill will be sent to you, which you need to pay so you can use your credit card for purchases again. That amount is called your balance, and the amount you have left to borrow is called your available credit.
You can pay your monthly balance in full or at least its minimum. Your credit card company set the minimum balance payment, which is at least 1% of the outstanding balance.
Other fees include interest, any default charges, and an annual fee if there is one. However, you wouldn’t have to pay interest if you pay your bill in full unless you used your card to withdraw cash.
Credit score and credit limit
When applying for a credit card, issuers will first assess your ability to pay off the money you’ll borrow. That’s your credit score, a number assigned to a person indicating their capacity to repay a loan to lenders.
They’ll check your credit file to see your credit rating. Your credit rating affects your credit score, and a good one will improve your chances of getting your credit card application approved.
Besides better chances of having your credit card application approved, a good credit rating can also give you access to cards with lower interest rates and more promotional offers. In addition, once the issuer determines your credit score and approves your application, they’ll set a reasonable credit limit you can use to spend with your credit card.
You can increase your credit limit over time using your credit card, and doing so will mean using it in a way that’ll improve your credit score. One of the simplest ways to do this is to pay your monthly bill in full to avoid interest charges.
Credit cardholder rights
Every credit cardholder should understand their rights to help protect their finances if any misuse or disagreement with a merchant or issuer occurs. Here are laws that address credit cardholder rights:
- Truth In Lending Act (TILA)
The TILA forms the basis for federal laws defining how lenders extend credit to consumers, including credit card issuers. This law requires card issuers to accurately disclose credit card terms at specified times and often in a standardized format. Its purpose is to give cardholders the ability to understand credit card terms, including the various interest rates.
Unclear presentation of information relating to applicable interest rates or other credit card fees may result in unexpected fees or increased interest on a balance. This means the use of confusing language or burying such information in a billing statement, making it difficult for consumers to find and comprehend.
Things like incurring an annual fee charge after accepting a credit card offer without one can happen due to complicated terms. If you believe your credit card company failed to disclose such information clearly or present them to you, you can file a complaint on them with the Consumer Financial Protection Bureau (CFPB).
- Credit Card Accountability, Responsibility, and Disclosure Act (The CARD Act)
The CARD Act enhances two consumer protections, transparency and fairness.
This law indicates that more transparency should be created for consumers to easily understand the costs of credit cards and compare the terms of different cards. It also aims to prevent card companies from committing certain unfair practices, like increasing the rate on balances over the credit limit while imposing an over-limit fee.
Other violations of this law include receiving 45 days’ notice of an interest rate increase in a billing statement without a prominent notice. Because of things like this, you may pay additional fees or interest prohibited by the CARD Act.
To avoid paying unexpected fees on your credit card, you should thoroughly review agreements regarding rate increases and additional fees. Again, if you believe your card company unfairly disclosed or presented information regarding such matters, you can file a formal complaint with the FCPB.
- Fair Credit Billing Act (FCBA)
The FCBA outlines procedures for cardholders and issuers to follow in case of a billing dispute. As long as you follow this law’s procedure, your credit card company must investigate and help you resolve your billing dispute.
If you want to dispute your credit card bill, you must send a letter to your card issuer’s billing inquiry address within 60 days after they mailed the billing statement. The following information must be included in your letter:
- Account number
- Description of the billing error in your statement
You can ensure your protection by also following these additional procedures:
- Mail the letter by certified mail with a request for a return receipt
- Include a copy of the sales receipts and other supporting documentation
- Make a copy of your letter and retain it
- Fair Debt Collection Practices Act (FDCPA)
The FDCPA protects cardholders’ rights if issuers direct a collection agency to collect delinquent payments. This law is crafted to prevent abusive, deceptive, and unfair debt collection practices.
It can protect you from receiving calls from collection agency representatives who threaten you and makes false statements unless you pay your past due credit card bill.
It can also help when a collection agency files a lawsuit against you to recover the amount your issuer disputes. If the agency successfully obtains a judgment in its favor, it can recover the disputed amount by seizing your assets, such as funds in your bank accounts.
If you believe your issuer or a debt collection agency has violated the FDCPA, you can file a complaint with the FCPB. If a lawsuit has been filed against you because of an illegitimate credit card debt, counter by hiring an attorney for help.
- Equal Credit Opportunity Act (ECOA)
The ECOA prohibits credit card issuers from discriminating against any individual seeking to apply for a credit card. This act doesn’t allow them to deny anyone a credit card based on an applicants’ race, national origin, color, religion, sex, age, marital status, or receipt of public assistance funds.
While a credit card company may ask you about these personal qualities, it must base its approval and terms of your cardholder agreement on relevant factors, like your income, credit score, and debt level.
A lender like a credit card issuer in violation of the ECOA may be required to pay you actual damages, punitive damages (more for class-action lawsuits), court costs, and attorney’s fees.
- Lost or Stolen Credit Cards
The TILA and FCBA outline the procedure you should follow if you lose or have your credit card stolen. By doing so, you’ll be able to limit your liability.
You won’t have to pay for any unauthorized charges made to your card after you report it’s been stolen or lost to your issuer.
The same conditions apply when someone gains access to your card account to make an unauthorized charge over the phone or internet.
However, if an unauthorized charge is made before you report your card’s been stolen or lost, you’re liable to pay up to $50. To avoid incurring liability fees, you have to file the report a day you’ve learned about the theft or loss.
Although if you can show that extenuating circumstances kept you from learning about the theft or loss of your card, your bank must extend the notification period. Such circumstances may include prolonged illness or travel.
Creating a paper trail is another way to ensure you don’t have to pay any amount for your lost or stolen credit card. You can do so by confirming that you contacted your issuer about the unauthorized use of your card by sending a letter by certified mail.
Editor’s Note on Credit Card Ownership:
Owning a credit card is a privilege and a responsibility. We at Consider The Consumer encourage credit cardholders and our readers who plan to apply for one to educate themselves on what to do if they encounter any trouble with their issuer or merchants.