The Consumer Financial Protection Bureau, in its efforts of overhauling the credit card system and the way it deals with customers, released its latest “Defined Terms”. We review them below, but if you’d like to see an interactive introduction, be sure to check out its presentation at consumerfinance.gov. Below, we go through each of the elements behind the changes and what it means for consumers and their credit cards. Make no mistake – these changes have the capacity of empowering every credit card consumer in the nation. Still, there can’t be an absence of personal responsibility, so be sure to explore what each of these changes mean for you and your family.
What we noticed first was the disclaimer from CFPB that reads, in part,
…if your issuer uses the Consumer Financial Protection Bureau Definition of Credit Card Terms, you are not entering a contract with the CFPB. Your credit card contract is between you and your issuer.
This is important because it tells us a few things. First, the input from CFPB for these changes was significant. But also, that statement reiterates that the relationship is always between you and your credit card company – the terms and conditions are important for consumers and they should always be reviewed prior to opening any kind of financial account. Credit card companies aren’t required to use the verbiage provided by CFPB as the consumer watchdog group states, but odds are, your credit card company will adopt them verbatim. If you’re wondering where your credit card network falls, look for a disclaimer stating it’s adopted them at the beginning of your terms and conditions.
Also too, because of our space limitations, our list isn’t all inclusive. Instead, we opted to hone in on some of the more traditionally confusing definitions, so be sure to seek out the complete list of rules and definitions.
APR or Annual Percentage Rate
We all know what APR is, but in recent years, we learned one credit card account can easily include more than one APR. Different APRs may apply to different balances on your account. Cash advances have one percentage rate while your purchase balance is calculated using a a different number. Your card company uses the APR that applies to each balance to calculate the interest that’s owed on the account.
Your credit card company will assign your credit card contract if it sells or hands off your account to a third party any or all of its rights or obligations under the contract, including any amount that you owe under that contract. That third party will then gain all rights under the contract, including contractual rights to collect amounts that you owe on the account.
An authorized charge is any charge that you or any authorized user makes on the account along with any fees and interest charges owing on the account. Any charge made by an authorized user is an authorized charge. This is true even if you told the authorized user not to make that specific charge. Further, a charge will still be authorized even if it is an illegal transaction (like illegal gambling charges), if it puts you over your credit limit, or if it is made after your account has closed.
If you loan your credit card to anyone else, that person becomes an authorized user. That’s important since there still lacks clear guidance on whether it’s a permanent classification. For instance, if you loan your credit card to a friend or family member to purchase, say, a birthday gift for a mutual friend, you might be allowing a permanent authorization to that person whom you loaned your credit card. Be sure to check with your card company for even more clarification on this particular aspect.
Average Daily Balance Method with Compounding
This is one of those confusing terms that many consumers find complicated – and for good reason. There’s nothing more frustrating than financial lingo cobbled together with legal lingo. In short, though, your card network calculates the interest charges for each balance by applying the “daily periodic rate” for that balance to the “average daily balance” for that balance. It then multiplies the result by the number of days in the billing cycle for a total in interest charges for that balance for that billing period. The “daily periodic rate” is a daily interest rate. The daily periodic rate for a given balance is equal to the APR for that balance divided by 365.
The “average daily balance” is also calculated for each balance. This is done by starting with the beginning amount of that balance for each day. Any new charges are added as is the interest from the previous daily balance if there is one in that billing cycle. From there, payments and/or credits are subtracted for the “daily balance.” From there, the “average daily balance” for each balance is figured by adding all the daily balances for each day in the billing period and then dividing by the total number of days in the billing period. The addition of the prior day’s interest to the daily balance calculation causes interest to compound daily. Finally, fees are added that are specific to a particular charge to the same daily balance as that particular charge.
Average Daily Balance Method without Compounding
This number is figured by calculating the interest charges for each charge by using the “daily periodic rate” for that balance to the “average daily balance” for that balance. From there, the result is multiplied by the number of days in the billing cycle for the total interest charges for that balance for that billing period.
Of course, this is self-explanatory, but the information that’s contained on your bill is now much more detailed. Your bill is the statement of your account and will tell you the total amount due at the close of that billy cycle the minimum amount that must be paid on or before the due date and a host of other information, such as information on how quickly you can pay down your balance when you make more than the minimum payment.
Your credit card company may or may not send you a bill if you have a balance of less than one dollar. Also, if your account has been turned over to collections, you won’t receive a bill.
Clearly this is a very short list of terms, but ideally, it will serve as an incentive to explore what the new laws mean for you. The rest of these terms, along with a host of other new information, can be found at the CFPB website at consumerfinance.gov.