Community Dividend

Credit card buyers, look before you leap to new card

Before deciding to accept preapproved credit card offers, consumers should research and compare the features of the agreements they're offered.

Lisa DeClark - Senior Community Affairs Examiner

Published July 1, 1999  |  July 1999 issue

Who has not received a "pre-approved" credit card solicitation in the mail? Most of you probably receive a few solicitations each month.

Competition among credit card issuers is fierce, resulting in better credit accessibility and more choices for consumers. Given these factors, each current or potential credit card borrower should be evaluating (or re-evaluating) the available options. Whether you are looking for your first credit card or evaluating the suitability of a current credit card, you need to educate yourself.

If you receive a pre-approved credit card solicitation, the credit card issuer has already decided to issue you a credit card, if you meet its established criteria. Now, you need to decide whether to accept the offer. First, you need to evaluate how you will use the credit card. Second, you need to read the entire solicitation, including the fine print, very closely. The solicitation will provide you with valuable information to determine whether the credit card is suitable for you. Finally, evaluate your own creditworthiness. If you have sufficient income and a good credit history, you might be able to negotiate a lower rate or annual fee.

Shop, shop, shop!

Before you decide to accept a pre-approved credit card offer, you should shop around to make sure you get a credit card that suits your needs. Credit card terms and conditions vary considerably.

To make your comparison shopping as effective as possible, you need to consider how you use a credit card. Do you pay your credit card bills in full each month? Do you always have a balance due? Do you use the cash advance feature? Do you require any special terms or features?

Once you have identified your needs, you can start shopping for the appropriate credit card.

What's in the fine print?

Just as credit card terms and conditions vary, so do the pre-approved credit card disclosure forms. Fortunately, a federal regulation, Regulation Z—Truth in Lending Act, requires all consumer credit card issuers to disclose, in writing, certain types of information using similar terminology.

In addition to requiring the use of similar terminology, Regulation Z also requires credit card issuers to make certain important disclosures in a similar format. You simply need to read the disclosure forms and understand the terminology to do your comparison shopping.

You will find the following disclosures on credit card solicitations, including pre-approved solicitations, and applications. With the exception of the last two items, each of the following disclosures must be disclosed in a table format.

  • Annual percentage rate.The annual percentage rate (APR) is the cost of credit, expressed as a yearly rate. For most credit card plans, the credit card issuer has the right to change the APR; these are variable-rate plans. Credit card issuers are required to disclose whether the APR may vary and how it is determined.

    If you are not the type of borrower who always pays your credit card balances in full, the APR will be particularly important. You will want to find a card with the lowest possible APR.

    On the other hand, if you pay your credit card balances in full, the APR may be less important to you than other types of fees, such as the annual fee and transaction fees, and features, such as grace periods.

  • Balance computation method for finance charge calculations. The balance computation method determines the balance that the credit card issuer will use to calculate your periodic finance charge: the interest you must pay each month.

    There are four common balance-computation methods. The average daily balance method is used by most credit card issuers. The adjusted balance method, where the current purchases are not included in the balance until the following billing cycle, is the method typically most favorable to consumers. Other common methods use the previous balance or the previous two balances.

  • The minimum finance chargeis any fixed or minimum finance charge that the issuer can charge during a billing cycle.

  • The grace periodis the period during which you can avoid a finance charge by paying your balance in full. If you carry a balance from month to month, there is typically no grace period on new purchases. If you pay your balances in full, the grace period will be an important feature for you.

  • Issuance or availability fees.Some credit cards charge approval, opening and/or annual membership fees for participating in the credit card plan. If you pay your credit card balances in full, you should be more interested in finding a credit card plan with a low annual fee than a low APR.

  • Transaction fees.Many credit card issuers charge fees for certain types of transactions, such as cash advances.

  • Other charges.Some credit card issuers charge other fees, such as application fees, late-payment fees, or exceeding-the-credit-limit fees.

Again, it is important to read the disclosures to do your comparison shopping. Once you decide to accept a pre-approved credit card solicitation or have an application approved by a credit card issuer, your understanding of the terms and conditions of the credit card plan should prevent any surprises once you receive the credit card.

Making sense of the terminology

Despite the disclosure requirements of Regulation Z, credit card solicitations can be confusing. Below, you will find some disclosure issues and practices that often cause confusion among consumers.

  • Introductory or discounted interest rates.Some credit card issuers offer low introductory interest rates. Most introductory rates last for a short period, such as six months, and then the credit card issuer increases the interest rate on your credit card plan. Typically, when the introductory period expires, your entire outstanding balance (as opposed to just new purchases) will be subject to the higher finance charge. Sometimes the introductory fee only applies to certain types of transactions, such as new purchases or rollover balances.

    Even if the credit card issuer initially offers you an introductory or discounted interest rate, it must disclose the APR that would otherwise apply to the account. For a fixed-rate account, it must disclose the rate that will apply after the introductory rate expires. In a variable-rate account, the card issuer must disclose a rate based on the index or formula applicable to the account.
  • "Pre-approved" versus "pre-qualified" offers.A pre-approved offer generally requires only your acceptance, typically in writing, but sometimes only verbal, of the offer.

    A pre-qualified offer differs from a pre-approved offer; it simply means that you have been selected to apply for the credit card. The creditor in a pre-qualified offer typically has not reviewed any information about you or your credit history.

    The provisions of the Fair Credit Reporting Act make it even harder to determine if an offer is truly a pre-approved offer. This act specifically allows a lender offering a pre-approved card to verify that you meet the issuer's criteria after acceptance. The issuer is not required to disclose that they will re-verify your status or employment. So, even with a pre-approved solicitation, you can be rejected if there have been changes in your financial picture.
  • Pre-approved "up to" a specified credit limit. Many pre-approved credit card solicitations will state that you may qualify for credit "up to" a certain credit limit. Once you respond to the solicitation, the credit card issuer will review your credit history to determine your credit limit, which might be significantly less than what you expect based on the solicitation.
  • High fees.Sometimes credit card issuers disclose and assess high up-front fees. These fees might include an annual fee and a card reservation fee, among others. These fees can add up quickly. Imagine your surprise if you were to receive a credit card with a $300 credit limit with $150 in up-front fees charged to your account before you even used the credit card. Fortunately, all the fees must be disclosed, so be careful to read the entire solicitation.
  • Secured credit cards versus unsecured credit cards.Most credit cards are unsecured lines of credit; however, some credit card issuers offer secured credit cards. Typically, borrowers with credit history problems will not qualify for unsecured credit cards, making the secured credit cards an attractive option. Issuers of secured credit cards require borrowers to deposit funds to guarantee repayment of the credit card debt. The required deposit usually equals the credit limit on the card, and issuers may pay interest on the deposit. Most secured credit cards carry a higher interest rate than unsecured credit cards.
  • Cash advances.Most credit card issuers impose both finance charges and transaction fees on cash advances. The finance charge (interest) typically begins accruing from the date of the advance; there generally is no grace period for cash advances. Further, a transaction fee, sometimes as much as 2.5 percent of the transaction, may be charged for the advance.

    You should beware of solicitations and advertisements that state "no finance charge" for cash advances. Since the term finance charge only refers to interest, the issuer still might charge a transaction fee for cash advances.

Unscrupulous practices

Further complicating your review of credit card solicitations is the presence of unscrupulous lenders. Following are some potentially unscrupulous practices that occasionally are encountered.

  • Advance-fee or guaranteed loans.Some credit solicitations or advertisements guarantee that you will get a loan, but require you to pay a fee before you apply for the loan. If a solicitation or advertisement guarantees you a loan, but requires you to pay a fee before applying, there is a strong chance that the offer is not legitimate. Most legitimate lenders will not guarantee you a loan for a fee before receiving an application. Beware of any offers of easy credit.
  • "900" or "976" telephone numbers. Some credit solicitations or advertisements state that you can get more information by calling a "900" or "976" telephone number. Some of the solicitations or advertisements do not disclose the cost of these telephone calls; these are most likely to be the offers that are not legitimate. You pay for these telephone calls; sometimes the costs can be quite high. Further, after making the telephone call, you may never receive the credit card.

Follow these rules

You need to be cautious when shopping for a credit card. To avoid any surprises, remember a few simple rules.

First, if the offer seems too good to be true, it probably is not legitimate.

Second, credit card issuers are required to disclose certain terms and conditions at the time of application or when you are sent a pre-approved credit card solicitation. Read the disclosures, including the fine print, before accepting any pre-approved credit card solicitation.

Third, understand how you use a credit card in order to obtain the most cost-effective credit card.

Finally, remember that competition among credit card issuers is fierce and negotiating for a lower interest rate or annual fee might yield results.

Filing a complaint

If you have a problem with your bank regarding your credit card, it is best to try to resolve the complaint directly with the bank. If that is unsuccessful, you have the right to file a complaint against the bank.

To file a complaint, you need to determine the bank's primary federal regulator. If you have received a credit denial notice, the name of the primary federal regulator must be printed on the notice. If you do not have this information, you can conduct an institution search at www.ffiec.gov/nicpubweb/nicweb/nichome.aspx to determine the appropriate regulator to contact. Each regulator has a consumer or customer assistance section to assist you in filing your complaint.

For more information, contact:

Federal Deposit Insurance Corporation
www.fdic.gov
(202) 942-3100

Federal Reserve Board
www.federalreserve.gov
(202) 452-3946

Office of the Comptroller of the Currency
www.occ.treas.gov
(800) 613-6743

Office of Thrift Supervision
www.ots.treas.gov
(800) 842-6929

National Credit Union Administration
www.ncua.gov
(703) 518-6300

Federal Trade Commission
www.ftc.gov
(202) 326-2222

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