The Consumer Credit Protection Act of 1968, which launched the 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;
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 dealings.
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;
·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 handbook 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.
The Cost of Credit
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 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 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 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 insurance premiums. 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 the three credit arrangements on the next page.
How do these choices stack up? The 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 then by paying the loan off over a longer 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 the APR.
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. 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.