Merchandise You Never Received?
Building a Better Credit
Car Ads: Reading Between the Lines
Choosing and Using Credit
Cosigning a Loan
Credit, ATM and Debit Cards: What To Do If They're Lost or
Credit and Divorce
Credit and Debit Card
Credit and Your
Credit Insurance: Is It
The Credit Practices Rule
Credit Repair: Self-Help
May Be Best
Easy Credit? Not So Fast. The Truth About Advance Fee-Loan
Equal Credit Opportunity
Fair Credit Billing
Getting Credit: What You Need to Know About Your Credit
Getting Credit When
You're Over 62
Gold and Platinum Cards
How to Dispute
Credit Report Errors
How to File a Consumer Complaint about a Bank
Keys to Vehicle Leasing
Negative Credit Can
Squeeze a Job Search
Payday Loans = Costly Cash
Ready, Set... Credit
Understanding Vehicle Financing
|The Credit Practices Rule
If you are one of the millions of
Americans who borrows money, buys items on installment
credit, or cosigns for another person's debt, you may
want to know about the Federal Trade Commission's Credit
Practices Rule. The Rule, which became effective March
l, l985, prohibits many creditors from including certain
provisions in consumer credit contracts. It also requires
creditors to provide a written notice to consumers before
they cosign obligations for others about their potential
liability if the other person fails to pay. Finally,
it prohibits one method of assessing late charges.
The Rule applies to consumer credit contracts offered
by finance companies, retailers (such as auto dealers
and furniture and department stores), and credit unions
for any personal purpose except to buy real estate.
It does not apply to banks or bank credit cards; to
savings and loan associations; or to some non-profit
organizations. (However, similar rules for banks --
under the Federal Reserve Board -- and for savings and
loans -- under the Office of Thrift Supervision -- went
into effect January 1, 1986.) The Rule does not apply
to business credit.
provisions are prohibited?
The Rule prohibits creditors from including certain
provisions in their consumer credit contracts. Specifically,
credit contracts no longer can include provisions that:
- Require you to agree in advance, should the creditor
sue you for non-payment of a debt, to give up your
right to be notified of a court hearing to present
your side of the case or to hire an attorney to represent
you. (These clauses were often called "confessions
of judgment" or "cognovits.")
- Require you to give up your state-law protections
that allow you to keep certain personal belongings
even if you do not pay your debt as agreed. (These
clauses were called "waivers of exemption.")
State law generally allows you to keep your home,
clothing, dishes, and other belongings of a fixed
minimum value. However, when the debt incurred is
to purchase an item and that item is used as security
for the debt, it is permissible under the Rule for
a creditor to repossess that item.
- Permit you to agree in advance to wage deductions
that would pay the creditor directly if you default
on the debt, unless you can cancel that permission
at any time. (These clauses were called "wage
assignments.") However, a wage or payroll deduction
plan, through which you arrange to repay a loan, is
a common payment method and is permissible under the
- Require you to use as collateral certain household
and uniquely personal items that are of significant
value to you but are of little economic value to a
creditor. Such items include appliances, linens, china,
crockery, kitchenware, wedding rings, family photographs,
personal papers, the family Bible, and household pets.
(These were called "household goods security"
clauses.) However, if you borrowed money to buy any
of these household or personal items, and use the
items as collateral, the creditor can repossess the
purchased item if you do not repay the loan.
must be given to cosigners?
When you agree to be a cosigner for someone else's debt,
you are guaranteeing to pay if that person fails to
pay the debt. The Rule requires that you be given a
notice that explains the responsibility you are undertaking.
Under the Rule, the cosigner notice must say:
You are being asked to guarantee
this debt. Think carefully before you do. If the borrower
doesn't pay the debt, you will have to. Be sure you
can afford to pay if you have to, and that you want
to accept this responsibility.
You may have to pay up to the full
amount of the debt if the borrower does not pay. You
may also have to pay late fees or collection costs,
which increase this amount.
The creditor can collect this debt
from you without first trying to collect from the
borrower.* The creditor can use the same collection
methods against you that can be used against the borrower,
such as suing you, garnishing your wages, etc. If
this debt is ever in default, that fact may become
a part of your credit record.
This notice is not the contract
that makes you liable for the debt.
*Depending on your state, this may
not apply. If state law forbids a creditor from collecting
from a cosigner without first trying to collect from
the primary debtor, this sentence may be crossed out
or omitted on your cosigner notice.
This notice is not required when you
receive benefits from the contract, such as when you
buy goods, take out a loan, or open a joint credit-card
account with another person. In these cases, you would
be a co-buyer, co-borrower, or co-applicant (co-cardholder)
rather than a cosigner. Therefore, the creditor would
not be required to provide the notice.
How can late
charges be assessed?
A creditor can charge a late fee if you do not make
your loan payment on time. However, it is illegal under
the Rule for a creditor to charge you late fees or payments
simply because you have not yet paid a late fee you
owe. This practice is called "pyramiding late fees."
Under the Rule, this means that if you do not include
the late fee you owe with your next regular payment,
it is illegal for a creditor to subtract the late fee
from your payment and then charge you a second late
fee because the current payment is insufficient. For
example, your loan contract may state that your monthly
payments are $100 and that you will be assessed a $10
late fee if you pay after the grace period. If you make
your $100 loan payment after that time and you do not
include the $10 late fee with your next $100 payment,
a creditor cannot first deduct the missing $10 late
fee from the $100 payment, claim you have now paid $90,
and then charge you an additional late fee. But, if
you skip one month's payment entirely, the creditor
can charge late fees on all subsequent payments until
you bring your account up to date.