Consumer Concerns for Older Americans NATIONAL CONSUMER LAW CENTER INC 77 Summer Street, 10th Fl Boston, MA 02110 617 542-8010 www.nclc.org Advice for Seniors About Credit Cards Credit card debt can cause tremendous financial problems for consumers. Credit card problems are a leading cause of consumer bankruptcy filings. Contrary to popular myth, huge credit card bills are not mostly due to irresponsible overspending. Many low-income consumers resort to credit cards to meet pressing family needs after losing a job or due to an emergency. Others find themselves hopelessly in credit card debt due to snowballing finance charges, late fees, and other high fees. Older Americans are by no means immune from this problem. The average credit debt of older Americans rose by 89 percent between 1992 and 2001, from $2,143 to $4,041. Seniors between 65 and 69 years old saw the most staggering rise in credit card debt 217 percent to an average of $5,844. Among seniors with incomes under $50,000 (70 percent of seniors), roughly one in five families with credit card debt is in debt hardship, that is, they pay more than 40% of their income for debt payments. 1 This publication is designed to help elder advocates to educate their clients to use credit cards wisely. A companion Consumer Facts publication Your Credit Card Rights provides information on what to do when an older American has a problem with a credit card company or merchandise bought with a credit card. 1 Tamara Draut and Heather C. McGhee, Retiring in the Red: The Growth of Debt Among Older Americans, Demos, February 2004. 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
Things To Think About Before Taking A New Card 2 More than 5 billion credit card offers are mailed to consumers each year. These offers can be very enticing. Nearly every offer promises you some special benefit, such as a low rate or no annual fee. In some cases, the lenders lure you with frequent flyer miles, cash back, freebies such as T-shirts and mugs, or contributions to schools or favorite charities. In the past, if you had money problems, you rarely got new credit card offers. Lenders reviewed applications and chose not to offer credit if they considered you a bad risk. Times have changed. Many lenders now buy huge mailing lists and offer credit to everyone on the list without further evaluation. They offer credit cards to anyone with an adequate credit score, whether or not you can afford the credit or are already over-extended. Avoiding credit cards may not be a practical solution. It is difficult to get by in our society without a credit card. You may need a credit card when you travel, for transacting business over the Internet, or to place orders by telephone. Here are some suggestions to keep in mind when reviewing credit card offers. 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. Too much credit can lead to bad decisions and unmanageable debts. Opening too many new credit card accounts can also lower your credit score. 2. Beware subprime credit cards. Instead of turning you down because of bad credit, some lenders will offer you subprime credit cards. These cards generally come with very high interest rates, other expensive fees, and low credit limits. You may also be charged for unnecessary products such as credit protection. Some lenders will actually issue cards with low credit limits, then add so many fees that you can t charge any purchases to the card because you ll already be maxed out when you receive it! Other lenders use subprime credit cards as a trick to revive old debts from other credit card companies. They buy up your old debts, then offer you a new credit card. When the account is opened, the new lender slaps the old debt on the new credit card account. 3. Watch out for bait & switch offers. Some credit card lenders will send you an offer advertising an attractive, low-interest credit card with a high limit, but include - in the fine print - the caveat that the lender can substitute a less 2 More advice for consumers on credit cards is available in National Consumer Law Center, Guide to Surviving Debt (2002 ed). Available from the National Consumer Law Center publications, 617-542-9595, or www.consumerlaw.org. 2
attractive, more expensive card if you don t qualify. The substituted card often has a higher interest rate, more expensive fees, and/or a lower credit limit. 4. Look carefully at the interest rate. You should always know the interest rate on your cards and try to keep the rate as low as possible. It s often hard to do this, because the terms are so confusing and sometimes misleading. Credit card lenders usually have several interest rates for a credit card. They also constantly change their rates. Some important terms to understand are: APR This is the interest rate expressed as an annual figure. Most cards have different APRs for purchases versus cash advances versus balance transfers and other types of transactions. Variable rates. Most credit cards use variable rates, which change with the rise or fall of a common index rate (an example of a variable rate might be U.S. Prime Rate plus 5% ). If your rate is variable, you need to understand when and how it may change. Variable interest rates can be very confusing. And even fixed rates can be variable your credit card lender usually has the right to change your interest rate with just 15 days notice. "Teaser" rates. A teaser rate is an artificially low initial rate that lasts only for a limited time, such as six months or less. After that, the rate automatically goes up. If you build up a balance while a teaser rate is in effect, you ll end up repaying the debt at a much higher permanent rate. Penalty rates. Many credit card contracts, including those that advertise low permanent rates, provide in the small print that your interest rate increases if you make even a single late payment. Some lenders will increase your rate even if you are never late on their credit card, but are late with a payment to any other creditor or if your credit score drops too low. The penalty rate may be on top of late charges or other fees. You should review your contract to see if such terms apply. If you are having financial problems, late charges and penalty interest rates will put you further into debt, which can quickly spiral out of control. Even if you are not having financial problems, these terms are important if you make a late payment by accident. 5. Fees, fees, fees. Other terms of credit may be just as important as interest rates. Credit card companies now impose a myriad of fees late fees, fees for exceeding a credit limit, annual fees, membership fees, cash advance fees, balance transfer fees, even fees for buying lottery tickets with a card and keep raising these fees every year. These fees all add to the cost of a credit card, so that a card that appears cheaper with a low APR could end up being much more expensive. 6. Look for the grace period. Most credit cards offer a grace period or free ride period, the amount of time in which you can pay off purchases without incurring finance charges (cash advances usually don t have a grace period). 3
Without a grace period, finance charges begin accruing immediately, and a low rate may actually be higher than it looks. If you intend to pay off the balance in full each month, the terms of the grace period are especially important. Many credit cards have reduced their grace period. They have also reduced the time between when they send a bill and when the payment is due, increasing the risk that you will go past the grace period and pay both interest charges and a late fee. 7. Always read both the disclosures and the credit contract. You will find disclosures about the terms of a credit card offer in a box, usually on the reverse side of or accompanying the credit card application. Review these carefully. If the disclosure box is on the reverse side of the application, make a copy. You should also read your credit contract, which comes with the card. If you do not understand these terms, call the lender for an explanation. 8. If you take a credit card and discover terms you do not like: Cancel! You don t need to keep a credit card if you don t like the terms. Of course, if you have used the card, you will need to pay off the balance. You should also cancel the card if the lender changes the terms of your credit card and you don t like the new terms. Otherwise you will be stuck with the new (and probably unfavorable) terms. Understanding Alternative Types of Credit Cards Secured vs. Unsecured Credit Cards. All things being equal, you should use an unsecured card rather than a secured card. Since interest rates on secured cards are typically just as high as those on unsecured cards, the choice in favor of an unsecured card should be clear. Although most credit cards are unsecured, the discussion below lists different types of secured cards to watch out for. Credit Cards Secured By Your Purchases. Some credit card lenders claim to take collateral in items purchased with their card. If you have problems making payments, those lenders may threaten to repossess property bought with the card. In addition, this collateral may affect your rights if you later need to file bankruptcy. Most threats to repossess such personal property are not carried out because the expense of repossession outweighs the value of used property. Nevertheless, it is a good idea to use an unsecured card instead of a secured card whenever possible. Credit Cards Secured By a Bank Account. Another type of secured credit 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 4
in the account. These cards are usually marketed as a way to establish a good credit record by showing that you can make regular monthly payments. Some secured credit cards may be useful if you lack any credit history at all - for example, if you are a recent immigrant. However, you need to be careful in considering a secured credit card, especially if you have bad credit. You may be offered a subprime card with very high rates or fees, or that has abusive features. These cards are often marketed to consumers with poor credit records as a way to fix their problems. Credit Cards Secured By Your Home. Some lenders offer credit cards in connection with a home equity line of credit. Each time you use the card, the balance is secured against your home. In many cases, home improvement contractors offer these cards as a way to pay for home improvements. Sometimes the initial amount advanced is as much as your credit limit. Home secured credit cards are almost always a bad idea--the potential consequence of nonpayment is the loss of your family's shelter. Always beware of home improvement contractors offering credit. You will likely do better if you seek a traditional home equity credit line from a bank at a lower interest rate. Cashed Check Loans. Another credit offer to avoid takes the form of a check mailed to your home, usually by your credit card company. When you cash the check, you not only accept high interest rate credit, but also get stuck with a big balance on a new account right from the start. It is better to find a reasonable credit card offer and use the new card carefully. If you need a large lump sum, try to get a bank loan instead. Credit Cards vs. Debit Cards. Debit cards allow you to have money taken directly from your bank account to pay charges made with the card. Merchants accept debit cards, like credit cards, to pay for goods or services. Although they often look the same, there are important differences between credit and debit cards. When you use a debit card, the money is immediately taken from your bank account. This is different than using a credit card, where you are getting money as a loan that you only have to pay back when the credit card bill comes. If you have a debit card with a VISA or MasterCard logo on it, sometimes when you swipe your card at a point-of-sale device (the card readers at the grocery store or gas station), you are given the option of using the card as credit or debit. The credit option is confusing because really you are still using the card as a debit card. What this choice actually means for you is: do you want to use your debit card like an ATM card and enter your PIN (Personal Identification Number) for identification, or do you want to use your debit card 5
like a credit card and sign your name on the receipt for identification? Either way, the money is taken out of your bank account within a short period of time. There are advantages and disadvantages to using a credit card versus a debit card. Using a debit card reduces the risk of running up a big unpaid balance on a credit card. On the other hand, you may prefer a credit card's flexibility of slower repayment with interest. You may need this flexibility if you are on a tight budget and want to make sure that your most pressing debts are paid first. Your rights to dispute charges on debit cards (including debit cards used like credit cards) are more limited than with credit cards. For example, if you purchased a vacuum cleaner from a nearby store with your credit card and it breaks during the first week and the merchant refuses to fix it, you may dispute the charge for the vacuum with your credit card lender. (See the Consumer Facts publication Your Credit Card Rights for more information.) There are no similar rights when you use your debit card. Your responsibility for losses from a lost or stolen card can be much greater for a debit card than for a credit card. Avoiding Problems: Things to Think About When You Use A Card 1. Don t 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. Finance charges and others fees will add to your debt burden. However, using a credit card in a period of financial difficulty is preferable to taking out a home equity loan and putting your home on the line. 3. Don't get hooked on minimum payments. Many credit card lenders have dropped their minimum payments to as low as 2% of your balance. If you make only the minimum payment, you will be paying off your debt very slowly, if at all. For example, a $1,000 credit card balance with an 18% interest rate will take nearly 8 years to pay off if you just make a minimum payment of $20 per month (and that s without making any more purchases with the card). It will take a little over 4 years to pay off if you pay $50 per month. The longer it takes you to pay off the debt, the more interest you end up paying. 4. Don't run up the balance in reliance on a temporary "teaser" interest rate. 5. If you can afford to do so, make your credit card payments on time. Avoid late fees and penalty rates. 6. Avoid the special services, programs, and goods that credit card lenders offer to bill to their cards. Most of these special services--credit card fraud 6
protection plans, credit record protection, travel clubs, life insurance, and other similar offers--are bad deals. 7. Don t Max Out. Charging your credit card up to your limit is risky behavior. It s easy to get socked with high over-limit fees. Plus, a credit card account close to its limit will cause a big drop in your credit score. This may even cause the lender to impose a penalty rate. Advice If You Get Behind On Your Credit Card Payments 1. If you get into financial trouble, pay your higher priority debts 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. Don't let them convince you to use money set aside in your budget for your mortgage or car loan 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. 4. Never (or almost never) refinance credit card debt with a home loan. Don t do it even for a lower interest rate or lower payments. By trading in credit card debt for a mortgage loan, you risk loss of your home if you continue to have financial problems. 5. Consider going to a credit counseling agency. A reputable agency can help, but you need to choose wisely. See the Consumer Facts publication Tips on Choosing A Reputable Credit Counseling Agency for advice on picking a credit counseling agency. 3 For more information on budgeting and prioritizing debt, see National Consumer Law Center, Guide to Surviving Debt (2002 ed). 7
Additional Resources National Consumer Law Center, Truth in Lending (5th Edition 2003 and Supp.). National Consumer Law Center, Guide to Surviving Debt (2002 ed). Consumer Action, Annual Credit Card Survey, available at www.consumeraction.org. U.S. Public Interest Research Groups, Truth About Credit website, www.truthaboutcredit.org. This brochure was supported, in part, by a grant, number 90-AP-2483, 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 views or opinions do not, therefore, necessarily represent official Administration on Aging policy. August 2004. 8