F.A.R.E. Debt Education
Upon completion of this module, you will be able to:
- understand what the following letters stand for and how they protect the consumer:
- define the following terms:
- Grace Period
- Interest Rate
- discuss some components of choosing credit including:
- Pre-approved cards
- Truth in Lending Act
- Finance charge and APR
- Length of Grace Period
- Interest Rates
- Late Fees and Over-the-Limit Fees
Annual Percentage Rate (APR):
- This is how much the credit card will cost you, expressed as a percent of your balance per year
- Lenders are required by law to disclose the APR before you become obligated on the credit card account
- APRs can be fixed, meaning they stay the same over time, or variable, meaning they fluctuate with certain economic indicators
- If you choose a variable rate card, the law requires the lender to tell you that the rate may change, and which economic indicator, or index, the rate is tied to
- Periodic rate: lenders apply this rate to your outstanding account balance to compute the finance charge for the billing period
- Free period or grace period: if you pay your full credit card balance during the free period, you avoid extra fees called finance charges
- If you intend to pay the full balance each billing cycle, look for a credit card that offers a grace period
- If the credit card doesn’t, the lender can impose a finance charge from the date you make a purchase or the date that purchase is posted to your account
- Most credit cards do not offer a free period for cash advances
- Annual fees: some cards charge holders annual membership or participation fees. You must pay this fee whether you use your credit card or not. They typically range between $20-$100
The cost of borrowing money, expressed as a percentage, usually over a period of one year.
- On credit-card plans, interest rates change over time. Some of these adjustments are tied to changes in other interest rates, such as the prime rate or the treasury bill rate, and are called variable-rate plans. Others are not explicitly tied to changes in other interest rates and are called fixed-rate plans
- Fixed rate – A fixed annual percentage rate of the finance charge
- Variable rate – prime rate (PR) (which varies) plus an added percentage (For example, your rate may be PR + 3.9 percent.)
- Introductory rate – A temporary, lower APR that usually lasts for about six months before converting to the normal fixed or variable rate
Rule of 72
The Rule of 72 tells you the number of years it takes to double you money regardless of the interest rate. In reverse it also tells you the true costs for credit by the same rule.
Equation: 72 divided by % interest equals the # of years to double the investment.
Example: If you invest $1000.00 at 9% – 72 divided by 9% interest equals 8 years to double your investment to $2000.00
Now reverse it, and see how much time it takes for a finance company to double their “investment”. An example may be using a store credit card promotion, offering no payments and deferred interest for 2 years. If the loan is not paid off completely before the expiration of the promotional period, the interest on a $2000 purchase accruing at 14% would result in $480 interest charged. This is simple interest, with no late fees, penalty, or accrued interest in the calculation of the balance. If no payments or minimum payments were made to decrease the principal, the finance company would double the value of their original investment, your $2000 loan in five years (72/14= 5 years 1 month). When the interest rate is higher, or compounded, and includes any fees, they recapture their investment sooner.
Truth in Lending Act (TILA)
Truth In Lending Act
The Federal Truth In Lending act was originally enacted by congress in 1968 as a part of the consumer protection act. The law is designed to protect consumers in credit transactions by requiring clear disclosure of key terms of the lending arrangement and all costs. The law was simplified and reformed as a part the depository institutions deregulation and monetary control act of 1980.
What you need to know
T.I.L.A. Applies to each individual or business that offers or extends credit when four conditions are met:
- The credit is offered or extended to consumers
- The offering or extension of credit is done “regularly” [extends credit more than 25 times (or more than five times for transactions secured by dwelling) per year]
- The credit is subject to a finance charge or is payable by written agreement in more than four installments
- The credit is primarily for personal, family, or household purposes
Also, certain requirements apply to persons who are not creditors but who provide applications for home equity plans to consumers.
The Fair Debt Collection Practices Act (FDCPA)
The fair debt collection practices act (FDCPA) prohibits abusive communication and harassment tactics
The fair debt collection practices act is a federal law that outlines what information debt collectors can gather on you. It contains specific rules on how debt collectors can communicate with you at home and at work. These bill collector rules are designed to protect you from abuse, harassment, false and misleading tricks and illegal debt collector tactics.
Fair Credit Billing Act (FCBA)
Have you ever been billed for merchandise you returned or never received? Has your credit card company ever charged you twice for the same item? Has your Department store card failed to credit a payment to your account?
While frustrating, these errors can be corrected. It takes a little patience and knowledge of the dispute settlement procedures provided by the fair credit billing act (FCBA)
The law applies to “open end” credit accounts, such as credit cards, and revolving charge accounts – such as department store accounts. It does not cover installment contracts – loans or extensions of credit you repay on a fixed schedule.
“Consumers often buy cars, furniture and major appliances on an installment basis, and repay personal loans in installments as well.”
You’re Pre-Approved – Before You Choose a Card
No matter what kind of card and plan you choose, you should have access to the following information under the federal truth in lending act so that you can compare one card to another:
- Finance charges in dollars and as an annual percentage rate (APR)
- Credit issuer or company providing the credit line
- Size of the credit line
- Length of the grace period, if any, before payment must be made
- Minimum payment required
- Annual fees, if applicable
- Fees for credit insurance (if any), which pays off your loan if you die before the debt is fully repaid
Once you choose a card:
In the disclosure form from the credit-card issuer (usually a small, fine-print brochure), look closely at the credit terms we discussed earlier. Don’t forget about specifics like late charges (usually $15 to $30) and over-the-limit fees (around $20 to $25). Consider these factors along with how you pay your bills each month
More About Late Fees and Over-the-limit Fees
Late fees and over-the-limit fees are charges that are used by pretty much all credit-card issuers and not always in plain sight on your contract or statement. Read the fine print. If you can?t find the information you need or don?t understand, ask before you sign.
In this lesson we defined the following and how they impact what we actually pay for credit
- Annual percentage rate (APR)
- Grace Period – Free period or grace period: if you pay your full credit card balance during the free period, you avoid extra fees called finance charges.
- Interest Rate – The cost of borrowing money, expressed as a percentage, usually over a period of one year.
We discussed :
- The Truth in Lending Act (TILA)
- Fair Credit Billing Act (FCBA) and how this legislation regulates and provides operating guidelines for the creditors and protects the consumer.
- The Fair Debt Collection Practices Act (FDCPA) which outlines what information debt collectors can gather on you and provides specific rules on how debt collectors can communicate with you at home and at work
And finally we discussed some components of choosing credit, particularly:
- The Truth in Lending Act
- Late Fees and Over-the-Limit Fees
- Pre-approved cards