Credit Cards Loans And Debt Consolidation

Consumer Handbook
to Credit Protection Laws

Fedral Reserve Board

The Consumer Credit Protection Act of 1968—which launched Truth in Lending disclosures—was landmark legislation. For the first time, creditors had to state the cost of borrowing in a common language so that you—the consumer—could figure out what the charges are, compare costs, and shop for the best credit deal.

Since 1968, credit protections have multiplied rapidly. The concepts of "fair" and "equal" credit have been written into laws that bar 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 for consumers to settle billing disputes.

Each law was meant to reduce the problems and confusion about 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 dealings.

The laws say, for instance,

• that you cannot be denied 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 resolve errors in your monthly bill without damage to your credit rating and
• that you cannot have credit shut off just because you've reached age 62.

But let the buyer be aware! It is important to know your rights and how to use them. This handbook explains how the consumer credit laws can help you shop for credit, apply for it, maintain your credit standing, and, if need be, complain about an unfair deal. This handbook also explains what you should look for when using credit, details what creditors look for before extending credit, and reviews the laws' solutions to discriminatory practices that have made it difficult for women and minorities to get credit.

The Cost of Credit

Shopping Is the First Step

Credit is a convenience. It lets you charge a meal on your credit card, pay for an appliance on the installment plan, get a loan to buy a house, or pay for schooling and vacations. With credit, you can enjoy your purchase while you're paying for it, or you can make a purchase when you're lacking ready cash.

But there are strings attached to credit as well. 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 for the best terms.

What Laws Apply?

Two laws can 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 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

Credit costs vary. By remembering two terms—the finance charge and the annual percentage rate (APR)— 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—what these terms will be.

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 insurance premiums.

Example:

Suppose you borrow $100 for one year, and the interest is $10. If there is a service charge of $1, the finance charge will be $11.

The annual percentage rate is the percentage cost (or relative cost) of credit on a yearly basis, which is your key to comparing costs, regardless of the amount of credit or how long you have to repay it.

Example:

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 repay $110 at year's end, 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 finance charge 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 use a credit card.