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An Introduction To Credit And You
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 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; 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
fights and how to use them. This website 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
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 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, 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 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.
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