The Basic Rules of Credit Cards
by: Iowa Legal Aid
Credit cards are a source of credit, not a source of income. Using a credit card when you don't have enough cash to cover a major purchase or needed family living expense is generally a bad idea. Before you use a credit card to pay for food, shelter or utilities, look at your financial situation. Also look to federal, state, or local programs that offer help to pay rent or utilities.
Credit cards should only be used as a source of funding for emergencies such as car repairs, or for short-term loans for needed large purchases only. Before using your card to make a purchase, make sure you know that you will have the money to pay it off.
Here are the basic rules of credit cards:
Rule # 1. A credit card purchase is the same as getting a loan.
When you fill out a credit card application, you sign a written contract or make an oral contract over the phone. This contract sets out the terms and interest rate that a credit card company has. By accepting the credit card, you agree to the terms. This means if you do not pay back the whole amount you charge, you will pay the interest rate on the balance.
If you do not make payments, a credit card company can sue you for the money owed. They will likely call and try to work out a payment plan with you first. The credit card companies must go through a few steps before they can sue you. If you have questions about this, you should talk to an attorney.
Rule # 2. Credit cards charge a very high interest rate.
Credit card companies make their money by charging you interest on the money you borrow. The bigger the debt, the higher profits from interest. Credit card companies lure people to build up big balances by offering “deals” when you transfer balances. Ads may also offer a lower rate for a short period of time. Credit card companies do this so you will build up a big balance, not be able to pay it back immediately, and then pay them lots of interest.
Many companies charge 18% to 24% Annual Percentage Rate (A.P.R.) interest. Home mortgages and car loans usually have interest between 2-10%. If you want to get a credit card, you should look around to find the lowest interest rate. Interest rates and terms should be on credit card applications and on the back of monthly statements.
If you need to use credit to make a purchase, consider other options. Find out what forms of financing are available and consider the interest rate in making a decision.
Rule #3. Paying only minimum payments is very expensive.
Credit cards usually require a small minimum payment to be paid each month. The minimum payment is usually about two percent of the amount owed. Paying the minimum payment each month is very expensive: 1) it reduces your debt very slowly and 2) forces you to pay a lot of interest.
For example: a person has a credit card balance of $10,000 and never uses the card again. If the interest rate is 20% and the person only makes the minimum payment each month, the total payment is $11,600 of interest and that is after paying it for 9 years.
Rule #4. Credit cards add your unpaid interest to your balance due.
A credit card may advertise a “limit.” The limit is the maximum amount of debt the credit card company has pre-authorized. If you fail to make a payment, the unpaid interest is added to your balance. This can make you go over the limit. Most credit card contracts have penalties for exceeding your limit or paying late. These charges can be high, $20 or $25 per month, and can also add to your debt.
Rule # 5. Credit card terms are contracts and can be modified by mutual agreement.
If you get a late fee after you know you paid your bill on time or even if you paid late, you can ask the credit card company to waive the late fee. Many companies may be willing to waive the late fee if it is the first time you were late. You can also try to negotiate to lower the credit card interest rate.
It is most effective when doing this to find an application from another credit card which offers a lower rate and will let you transfer a balance. If you are unable to pay your credit card debt, you may be able to negotiate for a lower rate if you offer to cut up the card and agree to no future purchases.
If you are in financial trouble and don't think you can negotiate on your own, you may want to contact a reputable credit counselor. Many credit counselors will work for you for free or at a low cost.
Rule # 6. Credit cards are unsecured debt.
Credit card companies charge higher interest rates because they have greater risk. Most credit card debt is unsecured. This means the only way the company can get their money back is going to court and getting a judgment against you. The debt is unsecured because: 1) there are no purchased goods that the company can take back and 2) there are no goods that you agreed to give them if you did not pay.
Some store credit cards claim to have a security interest in goods purchased with their card. A security interest is a secured creditor's right to take the goods if the debt is unpaid. This right only comes after a creditor has followed the proper legal steps. If a creditor tells you they want goods back, you should talk to a lawyer.
People with more debt than they think they can pay may consider bankruptcy. Bankruptcy is a federal court action to help debtors reduce or eliminate their debt. Unsecured creditors and secured creditors are treated differently in a bankruptcy action. A secured creditor may still have a security interest in property after the bankruptcy. An unsecured creditor will usually have to settle for receiving only a small percentage of the value of the unsecured debt. It is better for the consumer to have unsecured debt, meaning debt that has no collateral (an object that can be repossessed if the debt is not paid).
If you are low-income and want advice about your credit problems, call Iowa Legal Aid at 1-800-532-1275. Iowans over 60 can call the Legal Hotline for Older Iowans at 1-800-992-8161.
Iowa Legal Aid provides help to low-income Iowans.
To apply for help from Iowa Legal Aid:
- Call 800-532-1275.
- Iowans age 60 and over, call 800-992-8161.
- Apply online at iowalegalaid.org
If Iowa Legal Aid cannot help, look for an attorney on “Find A Lawyer.” A private attorney there can talk with you for a fee of $25 for 30 minutes of legal advice.
*As you read this information, remember this article is not a substitute for legal advice.