The Truth in Lending Act (TILA) gives consumers the right to challenge billing errors and raise claims and defenses in credit card transactions.
Under the Fair Credit Billing provisions of TILA, within sixty days after receiving a statement of account first showing a charge, the consumer has the right to send a written notice to the creditor at the address given on the statement for disputes/inquiries (not the payment address) contesting the charge. The notice cannot be on a payment stub. It must give the account name and number, state that there has been an error in the bill and the amount of the error, and provide an explanation (15 U.S.C. §1666(a)).
Because of this limited period, it is absolutely essential that consumers review their credit card statements promptly upon receipt, check for any unauthorized or unidentifiable items, and complain about any such items in writing.
Billing errors include the following:
•that the item is not the consumer’s;
•that the amount is wrong;
•that the consumer does not recognize the merchant name or transaction and wants documentary evidence of the charge;
•that goods or services were not accepted or not delivered in accordance with the agreement;
•failure to reflect payment/credit; and
•computational or accounting errors.
Billing errors do not include defects in accepted goods or services performed. The billing-error procedure also does not allow complaints about contract terms or disclosures. You may have other rights with respect to such problems, but they are not covered by the Fair Credit Billing provisions.
Some Internet sites and credit repair organizations advise consumers to send billing-error notices complaining about contract terms or disclosures. This is not sound advice.
Upon receipt of a billing-error notice, the creditor must
a.acknowledge receipt in writing within thirty days; and
b.within two billing cycles (and in no event later than ninety days) either
1.correct the account; or
2.conduct an investigation and send the customer a statement in writing explaining why the entry is correct and, upon request, send documentary evidence of obligation. (15 U.S.C. §1666(a))
The credit card issuer may not take any action to collect before conducting the investigation (15 U.S.C. §1666a(a)). If the account is reported to a credit reporting agency, disputed amounts must be shown as disputed (15 U.S.C. §1666a(b)).
“Unauthorized use” is defined as use by a person other than the cardholder who does not have actual, implied, or apparent authority for such use and from which the cardholder receives no benefit (15 U.S.C. §1602(o)).
A person who is given a credit card by the account holder is an “authorized user” even if he or she uses it in a manner that exceeds the authority given by the principal cardholder. For example, if you give a card to the authorized user for the purpose of making one charge purchase in the amount of $100 and the recipient runs up $1,000 in charges, the charges are authorized because the merchant to whom the card is presented has no way of knowing of the restriction on authority. The only way to effectively revoke the authority is to have the account canceled.
Moreover, once charges appear on the monthly statement, if no objection is made, further charges of like nature may be “authorized.” This could present a problem with estranged spouses and significant others. If you do not trust an authorized user to make unlimited use of a card within the existing credit limit or any increased credit limit, cancel the account, and confirm any oral notice of cancellation in writing.
WARNING
Do not let other people use your credit cards—merchants and card issuers are not bound by any limitations you provide for the user.
Conversely, if the card issuer changes the address to which billing statements are sent without the consumer’s permission, the consumer may not have liability.
It is not a good idea to allow others to use your credit cards or to have authorized users on your accounts.
We have seen schemes whereby cardholders are offered money to have strangers added to their cards as authorized users, for the purpose of building up the strangers’ credit ratings. This is a very bad idea because you are liable for anything that the stranger does with the card. Also, credit card companies are taking steps to prevent this abuse.
A merchant who processes a charge for an excessive amount is not making unauthorized use of the card if the cardholder derives some benefit (e.g., if a car repair shop exceeds an estimate). However, there may be a billing error.
If the use was unauthorized, the maximum liability is $50 (15 U.S.C. §1643(a)(1)). That liability can be imposed only if (1) the card was an accepted credit card, (2) the card issuer has provided a method by which the user of the card can be identified as the person authorized to use it (such as a signature, photograph, or personal identification number [PIN]), (3) the card issuer has provided notice to the cardholder of potential liability and how to notify the issuer of theft or loss of the card, and (4) the unauthorized use took place before the cardholder notified the issuer that unauthorized used has occurred or may occur as the result of loss, theft, or otherwise.
If an issue arises as to whether a use of the card was authorized, the card issuer has the burden of proving the use was authorized within the rules described previously (15 U.S.C. §1643(b)). Again, however, furnishing a credit card to an authorized user makes essentially any use of the card “authorized” even if it contradicts the limitations given to the user.
Defective Goods and Other Claims and Defenses
If a credit card is used as a means of payment for goods or services (cash advances used to make purchases are not covered), a good-faith attempt is made to resolve the dispute with the merchant, the amount involved exceeds $50, and the transaction occurred within the same state as the cardholder’s mailing address or within one hundred miles of that address, the credit card issuer is subject to claims and defenses arising from the purchase (15 U.S.C. §1666i(a)). The location of the transaction is normally the place of delivery for mail or phone orders.
The location and amount restrictions do not apply if the issuer and the merchant are the same or related entities (e.g., department store credit cards) or have a franchise relationship (e.g., gasoline company credit cards) or the merchant obtained the order through mail solicitation involving the card issuer (junk mail enclosed with the bill).
Creditors and assignees often argue that the failure to dispute a charge within two billing cycles pursuant to the billing-error procedures forecloses a consumer from later contesting the charge. This is wrong. The limitation of two billing cycles applies to your right to assert a billing error under the Fair Credit Billing provisions; it does not act to create liability. Furthermore, the claims and defenses that may be raised go beyond the billing errors cognizable under the billing-error procedure. For example, a breach of warranty with respect to accepted goods—the product purchased is defective and does not work properly—is cognizable as a defense but not a billing error.
WARNING
Failure to dispute a charge within two billing cycles does not make you liable for the charge.
Other Rights of Consumers in Credit Card Transactions
The Credit Card Accountability Responsibility and Disclosure (CARD) Act requires credit card companies to give consumers
a.forty-five days’ advance written notice of a rate increase on a credit card before the increase takes effect;
b.forty-five days’ advance written notice of “any significant change” in the terms of an open-end credit plan; and
c.a “clear and conspicuous” right to cancel upon any such change or rate increase (15 U.S.C. §1637(i)).
If the cardholder decides to close or cancel the account in response to such a notice, that decision may not constitute a default or trigger an obligation to immediately repay or to repay with less favorable terms or to be assessed any penalty or fee.
The CARD Act also limits a credit card company’s ability to increase interest rates. A credit card company may increase credit card rates only
a.upon the expiration of a specified period of time not less than forty-five days and only with clear and conspicuous notice including a specified rate and not retroactively;
b.pursuant to a variable-rate agreement when the variable rate is tied to an index that is not under the control of a creditor;
c.at the end of and pursuant to a workout or temporary hardship plan and only with clear and conspicuous notice and in an amount not in excess of the rate charged in the same category of transactions charged before the plan began; or
d.after a minimum payment has not been made within sixty days after the due date and only with clear and conspicuous notice stating the reason for the increase and that the increase will terminate not later than six months after imposition if the creditor timely receives minimum payment. (15 U.S.C. §§1666i-1, 1666i)
These restrictions were aimed at abolishing formerly common “universal default” provisions, whereby one credit card issuer could increase interest rates because of a default on another card from a different issuer. This practice is no longer lawful.
If the consumer decides to cancel a credit card after a notice of a rate increase, the consumer may pay off any balance either in an amortization period of not less than five years or by making a required minimum payment of not more than twice the minimum payment required before the date of the increase.
TIP
Payments made at local branches of a bank must be posted on the date the payment was made for purposes of calculating late fees (15 U.S.C. §1637(b)(12)).
The CARD Act requires the credit card company to review accounts every six months if the interest rate has been increased in order to determine if the factors that the company used to justify the increase are still in effect. If they are not, it must return to the old rate.
Credit card issuers are now prohibited from charging an over-the-limit fee unless a consumer expressly requests the allowance of over-the-limit transactions (15 U.S.C. §1637(k)). The credit card company must provide advance notice of the over-the-limit fee. If the consumer elects to allow over-the-limit transactions, the credit card company must provide the consumer notice of the right to revoke the allowance each time the consumer incurs an over-the-limit fee. A credit card company may charge a consumer an over-the-limit fee only once during a billing period in which the credit limit is exceeded and only once during each of the two subsequent billing cycles unless (1) the consumer’s credit limit is increased to exceed the amount by which he or she is over the credit limit or (2) the consumer reduces his or her balance below the credit limit by the close of the billing period.
Credit card companies are prohibited from charging consumers a fee for making a payment by mail, telephone, or electronic transfer. However, a fee may be imposed if the consumer utilizes an expedited service provided by a customer service representative and the cardholder agreement so provides (15 U.S.C. §1637(l)).
Penalties imposed by a credit card company must be “reasonable and proportional” to the violation of the cardholder agreement (15 U.S.C. §1665d). Certain charges presumptively comply with this requirement.
Finance charges may not be imposed for a late payment if the payment was received by 5:00 p.m. in the manner and location established by the credit card company.
Payment amounts in excess of the minimum payment must be applied to the balance with the highest interest rate, except in the preceding two billing cycles before a deferred-interest balance is due. For example, cash advances generally have a higher rate than regular purchases. Payments must be applied to the cash advances first. Similarly, if there is a zero-interest or low-interest promotional balance, these are paid off last. Previously, card issuers did the opposite—apply payments to the lowest-rate balances first.
Credit card companies are prohibited from charging consumers any late fees or finance charges for sixty days following the effective date of a material change in the credit card company’s mailing address, office, or procedures for handling consumer payment that causes a material delay in the crediting of consumers’ payments (15 U.S.C. §1666c).
The payment due date must be the same day each month. If the due date falls on a weekend or holiday, a credit card company cannot treat a payment received the following business day as a late payment (15 U.S.C. §1637(o)).
Credit card companies may not treat any payment as late unless the credit card company has adopted “reasonable procedures” to ensure that each billing statement is mailed or delivered to the consumer at least twenty-one days before the payment due date. If a credit card company provides for a grace period during which time a consumer may repay any portion of the balance without incurring finance charges, the grace period must extend to twenty-one days after the periodic billing statement is mailed or delivered (15 U.S.C. §1666b).
NOTE
Credit card companies are prohibited from offering credit or increasing a credit limit without regard for a consumer’s ability to repay (15 U.S.C. §1665e).
Credit card companies may not use late payment or defaults on other debts as a basis for raising the rate on your credit card. “Universal default” clauses permitting such action were formerly common.
A credit card issuer may not increase the annual percentage rate (APR), fee, or finance charge within one year of the opening of the account or increase a promotional rate within six months of the date on which the promotional rate takes effect (15 U.S.C. §1666i2). Illusory “promotional” rates were previously a source of complaints.
The issuance of subprime “fee-harvester” credit cards is restricted. If a consumer is required to pay fees for the maintenance of a credit card account (other than late fees and over-the-limit fees) during the first year that the account is open, and the total fees exceed 25 percent of the total credit available, none of the fees may be charged to the credit card account (15 U.S.C. §1637(n)).
Special protections were created for minors and students. Credit card companies are prohibited from opening or issuing a credit card to anyone under the age of twenty-one unless the consumer has submitted a written application that (1) contains the signature of a cosigner who is over the age of twenty-one who has the means to repay debts incurred by the consumer and will be jointly liable, or (2) contains financial information showing that the consumer has an independent means of repaying any debt incurred. A credit card company must receive written consent from the cosigner before increasing the credit limit on a credit card account belonging to a consumer under twenty-one years of age. The cosigner will be jointly liable for the debt incurred as a result of the increased credit limit (15 U.S.C. §§1637(c)(8), 1637(p)).
There are additional protections for college students. Colleges and universities must disclose publicly any credit card marketing contracts between the institution and the credit card company (15 U.S.C. §1650(f)). Furthermore, credit card companies are prohibited from offering students at institutions of higher education any tangible item to induce the student to apply for or open a credit card account if the offer is made on the campus of an institution of higher education, near the campus of an institution of higher education, or at an event sponsored by or related to an institution of higher education.
NOTE
Gift cards may not expire for at least five years, and inactivity fees generally cannot be assessed prior to twelve months.
CAUTION
Debit cards may pose greater theft risks than credit cards.
These rules were designed to make it more difficult for people with bad credit and students to get credit cards.
Debit cards linked to asset (checking, savings) accounts have a different set of rights, governed by the Electronic Fund Transfer Act.
Many credit and debit card agreements provide for arbitration of any disputes. This means that you give up your right to sue the credit card company. Disputes must be resolved by private arbitrators, whose proceedings are secret and essentially not subject to judicial review. Class actions are generally prohibited. We call arbitration clauses a “license to steal.” Try to avoid them if you can.
Disclosure of Terms of Cardholder Agreements and Free Credit Reports
Credit card companies must establish and maintain an Internet site where they make cardholder agreements accessible (15 U.S.C. §1632(d)). They also must provide the Consumer Financial Protection Bureau with an electronic copy of each cardholder agreement, which it displays on a website. You can therefore determine if an agreement contains an arbitration clause or other undesirable terms.
Summary
You have the right to challenge billing errors in credit card transactions. You often have a defense against the credit card company if there is a problem with what you purchase. Be careful about who you allow to use your credit card. Unless you trust that person to make unlimited use of your card within the existing credit limit or any increased credit limit, do not allow him or her to use your card at all. You also have the right to advance written notice of rate increases and significant changes in terms; if you don’t like the changes, you can cancel the account and pay off the balance on the current terms.