Consumer Concerns for Older Americans

Advice for Seniors About Credit Cards

Credit card payment problems are the leading cause of chapter 7 consumer bankruptcy filings. Many low-income consumers take advantage of minimum payment provisions, multiple opportunities to obtain new cards, teaser rates, and high credit limits to meet pressing family needs.

Older Americans are by no means immune from this problem. Since 1993, more than a million people aged 50 and older have filed for bankruptcy. In a recent survey of these senior bankruptcy filers, the number one reason cited for filing bankruptcy was loss of jobs, followed by medical debt problems. The third most important reason cited for filing bankruptcy was to escape creditors' (most commonly credit card issuers) harassing debt collection tactics.1

In addition to the more than three billion credit card offers that are mailed to consumers each year, credit cards are advertised everywhere. While this increase in access to credit for low and moderate income debtors is generally a good thing, many debtors, including many seniors, have not been educated to resist the overwhelming marketing of credit which has pervaded our society in recent years. Effective financial education may help debtors avoid new problems in the future. This publication is designed to help elder advocates to educate their clients to use credit cards wisely.

Using Credit Cards Wisely

More than three billion credit card offers are mailed to consumers each year. These offers can be very enticing. Nearly every offer promises some special benefit to a new card. In some cases, the offer is for a low rate. In others, no annual fee is promised. These offers, however, never discuss the down side of a new card or the potential risks.

Ten Things To Think About Before Taking A New Card2

1. Avoid accepting too many offers. There is rarely a good reason to carry more than one or two credit cards. You should be very selective about choosing cards which are best for you. Having too much credit can lead to bad decisions and unmanageable debts.

2. Remember that lenders are looking for people who will run up big balances, because those consumers pay the most interest. You may find that credit companies are pursuing you aggressively by mail and phone. You should not view this as a sign that you can afford more credit. The lender may have a marketing profile based on your spending patterns, your credit record, your use of certain services such as home shopping, your magazine subscriptions, or even your zip code, which indicates to them that you are someone who is likely to carry a big credit card balance and pay a good deal of interest.

3. Interest rate is important, but not the only consideration. You should always know the interest rate on your cards and should try to keep the rate as low as possible. However, it is rarely a good idea to take a new card solely because of a low rate. The rate only matters if you carry a balance from one month to the next, and a temporarily low rate may encourage you to spend more than you can afford. In addition, the rate can easily change, with or without a reason. Remember that even the best credit card interest rates are relatively high rate credit.

Additionally, other terms of credit may add to the cost, so that a credit card which appears cheaper is actually more expensive. Annual fees, late charges, membership fees, and the method by which balances accrue can add to the cost of credit.

4. Beware of temporary "teaser" rates. A teaser rate is an artificially low initial rate which lasts only for a limited time and often for limited charges, such as transfers of balances from other cards. Most teaser rates are good only for six months or less. After that, the rate automatically goes up. Remember that if you build up a balance and pay it after the period of a temporary rate, the much higher permanent rate will apply to your repayment plan. This means that the permanent long term rate on the card is much more important than the temporary rate.

5. If your rate is variable, understand the basis on which it may change. Variable interest rates can be very confusing. Some variable rates conceal terms which ensure that your rate will go up steeply over time. Read the credit contract to understand how and when your rate may change.

6. Be careful about juggling cards to take advantage of teaser rates and balance transfer options. It takes a great deal of time and effort to juggle cards to take advantage of terms designed to be temporary. Remember that all teaser rate offers are designed to get you locked into the higher rate for the long term, because that is how the lender makes the most money. Even people who do successfully juggle many cards complain that use of numerous cards has a long-term negative impact on their credit record.

7. Investigate terms related to late payment charges and penalty rates of interest. Many credit card contracts, including those which advertise low permanent rates have provisions in the small print to increase your rate of interest if you make even a single late payment. This may be on top of late charges or other penalties. You should review your contract to see if such terms apply.

8. Learn your credit card's billing method. It is important to understand how you will be billed. If interest will apply from the date of your purchase without a grace period, a low rate may actually be higher than it looks. If you intend to pay off the balance in full each month, terms of the grace period are important. You need to understand how the grace period works and remember that many lenders do not mail bills until late in the grace period. Your payment may be due quite soon after you receive the bill in order to avoid additional accumulation of interest.

9. Always read both the disclosures and the credit contract. You will find disclosures about the terms of a credit card offer, usually in small print on the reverse or at the bottom of the offer. Review these carefully. However, the law does not require that all relevant information be disclosed. For this reason, you must also read your credit contract, which comes with the card. This will include terms such as late payment fees, default rates of interest, and a description of the billing method. You have several choices if you do not understand these terms. You can call the lender for an explanation. Or better yet, refuse credit with too many complex provisions, because those terms are likely to work to your disadvantage.

10. If you do take a credit card and discover terms you do not like: Cancel!

Avoiding Problems: Things to Think About Once You Choose A Card

1. It is important not to use credit cards to finance an unaffordable lifestyle.

2. If you get into financial trouble, do not make it worse by using credit cards to make ends meet. For example, if you use cash advances on your credit card to pay bills, the interest due will only add to your debt burden sooner rather than later.

3. Don't get hooked on minimum payments. If you pay only the minimum, chances are that you will not be paying down your debt, or that you will be paying it off very slowly. Especially if you are also making new purchases every month, the consequence of making minimum payments is that your debt will grow.

4. Don't run up the balance in reliance on a temporary "teaser" interest rate.

5. If you can afford to do so consistently with your budget plan, make your credit card payments on time. Be careful to avoid late payment charges and penalty rates if you can do so without endangering your ability to keep up with higher priority debts.

Also be advised that most lenders will waive a late payment charge or default rates of interest one time only. It is worth calling to ask for a waiver if you make a late payment accidentally or with a good excuse.

6. Avoid the special services, programs, and goods which credit card lenders offer to bill to their cards. Most of these special services such as credit card fraud protection plans, credit record protection, travel clubs, life insurance, and other similar offers are a bad deal. Products offered are generally overpriced. It is best to throw out advertisements, or at a minimum, to read them with a high degree of caution.

7. Beware of unsolicited increases by a credit card lender to your credit card limit. Some lenders increase your credit limit even when you have not asked for more credit. It is easy to assume that this means that the lender thinks you can afford more credit. In fact, the opposite may be true. Lenders generally increase the limit for consumers that they think will carry a bigger balance and pay more interest. You need to evaluate whether you can afford more credit based on your individual circumstances.

Things To Think About If You Get Behind On Your Credit Card Payments

1. If you get into financial trouble, pay your higher priority debts first. If your inability to pay your credit card debts is part of a larger financial problem which affects your home, your car, and your high-priority debts, it is critical to deal with the other problems first. Don't let yourself be pressured into keeping up with credit card payments at the risk of losing a home or car.

2. Do not move credit card debt up in priority because the creditor threatens suit. Credit card lenders are notorious for using aggressive debt collection agencies to collect from consumers. Whatever the collectors' tactics, whether abusive or polite, don't let them convince you to use money set aside in your budget for more pressing debts to make credit card payments.3

3. If you can afford to pay something less than the full amount of your credit card debts, contact each credit card lender and try to make a payment arrangement which fits your budget. The lender might also agree to waive fees, lower interest rates, or otherwise change the terms to make your payments more affordable.

Secured vs. Unsecured Credit Cards

Most credit cards are unsecured, which means that the creditor has not taken any collateral such as a home or car, for the debt owed. In general, all things being equal, you should seek and use credit cards which are unsecured in preference to those that are secured. Since interest rates on secured cards are typically just as high as those on unsecured cards, the choice in favor of unsecured cards should be clear.

Note: There are three ways in which some credit card lenders take collateral.

1. Some credit card lenders, usually store credit such as Sears, claim to take collateral in items purchased with their card. This means that if you have problems making payments, those lenders may threaten to repossess property bought with the card. Although most threats to repossess personal property are not carried out, it is a good idea to know whether the security interest exists. If it does, you should use an unsecured card in preference to the secured card whenever possible.

2. Another type of secured credit card involves card balances secured by a bank deposit. The card allows you a credit limit up to the amount you have on deposit in a particular bank account. If you can't make the payments you lose the money in the account.

These cards are usually marketed as a good way to reestablish credit for those who have had financial problems. They may be useful for this reason. However, since almost everyone now gets unsecured credit card offers even after previous financial problems, there is less reason to consider allowing a creditor to use a bank deposit as collateral. It is preferable for you not to tie up a bank account, or to pay interest to a lender for the privilege of establishing that you can afford to make payments.

3. Finally, there are increasing opportunities to obtain credit cards in connection with a home equity line of credit. Each time the card is used, the balance is secured against the home. In many cases these are sold by home improvement contractors who say it is a good way to pay for home improvements. Sometimes the initial amount advanced on such a card is as much or more than the consumer's credit limit.

Home secured credit cards are almost always a bad idea. The potential consequence of nonpayment is loss of your home by foreclosure. You should also beware of home improvement contractors offering credit. Seniors in particular are often the target of unscrupulous contractors who do not act in their best interest. A better idea is a more traditional home equity credit line from a bank at a lower rate of interest.

Credit Card Disputes

There are two types of credit card disputes which commonly arise. The first involves unauthorized use of a card, when someone steals, borrows or otherwise uses a card or card number without permission.

Under the law, a consumer's obligation for unauthorized use of a card is only $50.4 This means, for example, that if a card is stolen, the credit card lender can only charge you a maximum of $50 no matter how much the thief has charged on the card. (Note: This limit may not apply to a "debit" card).

You should immediately make a report as soon as you know of an unauthorized use of a card. If you call before the unauthorized use occurs, you cannot be charged even $50.

The second type of billing dispute which arises involves disputes about how much you owe. The law provides a basis to dispute these incorrect bills. Information about how to raise a dispute appears on the back of each bill, including the mailing address to use. In summary, you must raise a dispute in writing within 60 days of the first bill with the improper charge.5 You must include the following information:

Some examples of reasons for dispute are:

Dispute rights also apply to certain purchases on credit cards if you have problems with the quality of the goods or services purchased. These apply whenever the credit card lender owns the business from which the purchase was made, or advertises the goods or services purchased. In addition, this special right applies when the goods cost more than $50 and are purchased in your home state or within 100 miles of your mailing address.6 In order to dispute a charge for goods or services based on quality, you must have first made a good faith effort to resolve the issue directly with the merchant.

Once you raise the dispute, the credit card company is required to investigate and report back in writing. Until the dispute is resolved, you do not need to pay the disputed portion of the bill. However, payments to cover any undisputed amounts must be made.

ADDITIONAL RESOURCES

National Consumer Law Center, Truth in Lending (3d ed. 1995 and Supp.).

National Consumer Law Center, Surviving Debt: A Guide for Consumers (3d ed. 1999).

Strong, Howard, What Every Credit Card User Needs to Know (1999).

Also available from NCLC:

Consumer Concerns for Older Americans and consumer education brochures on a range of consumer topics including preventing foreclosures, Medicare managed care, and living trusts. Please contact NCLC for an order form.

ABOUT NCLC

In 1992, NCLC received funding from AoA to launch a National Legal Resource Initiative for Financially Distressed Older Americans, intended to improve access to and the quality of consumer representation for older Americans.

Since 1969, NCLC has been providing legal advocates with technical and expert assistance, training and publications that cover all major topics in consumer law. NCLC has established itself as the nation's consumer law specialist, making its legal expertise available to low income clients and their attorneys.

MAKING USE OF CONSUMER LAW

Consumer law is powerful but complex. In any given transaction, several defenses may exist against creditor or seller claims, but detailed research and calculations are required in order to spot defenses. With financially burdened clients, it is important to recognize that the emotional stress caused by indebtedness can impair decision making or lead to other difficulties beyond the debt crisis. This recognition can help head off other legal problems that could quickly develop.

NCLC is available to consult with legal advocates for the elderly on a wide range of consumer issues, providing leading and local case law, analyzing contract documents for federal and state law compliance, defining factual and legal issues, identifying expert and legal resources to strengthen cases and training attorneys in consumer law.

NCLC works with lawyers and others on consumer issues affecting low and moderate income Americans. This brochure was supported, in part, by a grant, number 90AM2151, from the Administration on Aging, Department of Health and Human Services, Washington, D.C. 20201. Grantees undertaking projects under government sponsorship are encouraged to express freely their findings and conclusions. Points of view or opinions do not, therefore, necessarily represent official Administration on Aging policy.

NOTE: This Consumer Concerns reflects the current law only. There are likely to be changes after this publication that advocates should keep careful track of.

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1 Professor Elizabeth Warren, "Bankruptcy and Older Americans", June 2, 1998.

2 Excerpted from National Consumer Law Center, Surviving Debt (3d ed. 1999). Available from the National Consumer Law Center publications, 617-523-8089, or www.consumerlaw.org.

3 For more information on budgeting and prioritizing debt, see National Consumer Law Center, Surviving Debt (3d ed. 1999).

4 15 U.S.C. § 1643; 15 U.S.C § 1693k. See generally, National Consumer Law Center, Truth in Lending, § 5.15 (3d ed. 1995 and Supp.).

5 15 U.S.C. § 1643; Reg. Z § 226.13(b)(1). See generally, National Consumer Law Center, Truth in Lending, § 5.8 (3d ed. 1995 and Supp.).

6 15 U.S.C. § 1666.

A publication of NCLC's National Legal Resource Initiative for Financially Distressed Older Americans
National Consumer Law Center - 77 Summer Street, 10th Fl. - Boston, MA 02110 - 617/542-8010

August 1999