Get credit for being informed

Credit is a product you buy just like any other product. The Sunday Times asked the Malta Financial Services Authority to explain the use of credit cards, giving some useful hints from a consumer protection point of view.

Very often consumers are lured by offers, such as "interest-free credit", which banks give for using credit cards. The credit card may be one of the most popular and easy ways of borrowing money - but it is surely the most expensive if the holder falls behind in payments.

It is another way of deferring payment for a good or service of which the customer avails of at the time of purchase and so can be defined as a method of payment in financial transactions.

Credit cards and debit cards are often referred to as "plastic money".

How credit cards and debit cards differ

Whenever a customer uses a credit card, he/she is borrowing money that is made available by the bank. As soon as a transaction is concluded between a customer and a vendor, the issuer pays the debt to the vendor and, in turn, the customer pays the money to the issuer.

By signing up for the transaction, the customer is actually agreeing to pay the money back to the issuer, in addition to any interest drawn on the amount borrowed. Usually charges apply for ATM withdrawals made by credit cards.

On the other hand, debit cards are bank cards used to make purchases of goods or withdrawals from funds already held in a bank.

Both cards may be used at automated teller machines (ATMs) to withdraw cash - a transaction often referred to as cash advance. In the case of a credit card, the user withdraws money "on loan" from the bank, which will in turn start charging interest straight away. In the case of a debit card, the user withdraws cash from funds he already holds in his account.

Mention may also be made of e-purses or prepaid smart cards. In contrast to a debit card, the e-purse is intended to facilitate a variety of small-value retail transactions. However, for the purposes of this article, the focus is mainly on debit cards and credit cards.

Applicable law

In Malta, there are two sets of rules which deal with credit card use and the way interest rates are charged for credit balance. Both are based on rules of the European Union.

In this day and age, the use of credit and debit card transactions is essentially carried out electronically. Indeed, such cards are often referred to as "electronic payment instruments".

The EU has a recommendation in force (currently under review), which seeks to ensure a high level of consumer protection in the field of electronic payment instruments and to promote customer confidence in, and retailer acceptance of, these instruments.

This Recommendation has been implemented by way of Directive No. 4 on Electronic Payment Services, enacted in terms of the Central Bank of Malta Act. The Central Bank is the authority responsible for the regulation of payment systems in Malta.

This Directive sets out the minimum requirements needed to ensure an adequate level of customer information on the conclusion of an electronic payment contract as well as once transactions are effected by means of this payment instrument.

The Consumer Credit Regulations, enacted under the Consumer Affairs Act, regulate the way the interest rate for credit cards will be calculated.

Legal Notice 84, published in March 2005 but not yet in force, introduces for the first time in Malta the concept of APR - Annual Percentage Rate, which is the total cost of the credit to the consumer expressed as an annual percentage of the amount of the credit granted and calculated in accordance with specific rules outlined in the legal notice.

"The total cost of the credit" means all the costs, including interest, commissions and any other kind of charge that the consumer has to pay for the credit.

The Consumer and Competition Division is responsible for the proper implementation of this legal notice.

Until the legal notice comes into force, the relevant legislation related to consumer issues is the CBM Directive and best practices.

The two parties involved in a credit card or a payment instrument are the issuer, i.e. the person who, in the course of his business, makes the card available, and the other person (the cardholder) according to a contract concluded between the two. The issuer may be a bank or any other authorised financial institution.

Obtaining a credit card from a bank

Owning a credit card is a serious matter. Before granting a card, the bank has to know whether the applicant satisfies a number of criteria to make him creditworthy, that he is, able to pay his credit as and when it becomes due.

A bank would have its own criteria, which need to be met before approving a credit card. Although a bank treats each application on its own merits, it would always take cognisance of the applicant's status, income and any other commitments which the applicant may have prior to awarding him/her with a card.

If the bank feels that the applicant is not creditworthy, it will not issue a card. Alternatively, it may ask the applicant to pledge an amount with it to ensure that, in the case of default on payment, it can use those funds to set off any long-outstanding balances.

A credit card may be very convenient if one does not wish to carry cash around. But it can also be very dangerous if one spends more than one can really afford, especially if one has several cards.

Credit card borrowing can take on an air of permanence - even though there is a set repayment schedule, the cardholder may opt to pay the minimum amount prescribed in the statement.

Cardholders should remember that the longer they take to pay their dues, the worse it may become because interest would accumulate in the meantime.

If payment of the outstanding balance is delayed, the bank will have every right to call back the card. Worse still, the holder will also risk tarnishing his creditworthiness. This in turn may affect one's ability to seek other credit facilities in the future.

The personal identification number

A personal identification number (PIN) is a four-digit code, which is used in certain systems to gain access and authenticate. Very often PINs are used at ATMs.

Throughout Europe, the traditional in-store credit card signing process is being replaced with a 'Chip and Pin' system where the customer is asked to enter the PIN code rather than signing.

This is being done as a result of the advanced technology that has become available on the black market enabling both reading and writing of the magnetic stripes, facilitating cloning and use of credit cards by third parties other than the owner.

Cardholders should never keep their PINs written down anywhere near the card.

Credit limits

The credit limit is the maximum amount of credit an issuer extends to a cardholder. It is also the maximum amount that a card holder may borrow on a single credit card.

The issuer usually sets a minimum credit limit. However, the cardholder may apply for a larger limit at any time. The credit limit is set on the basis of various factors relevant to the particular cardholder.

Some people measure their status by the amount of cards they have in their wallet. But whether one holds one card or many, there are some fixed obligations that a cardholder should know about and keep in mind.

Compliance

The cardholder is obliged to use the credit card and the debit card in accordance with the terms and conditions stipulated in the agreement, signed between himself and the card issuer (i.e., the bank). This includes taking all reasonable steps to secure the safekeeping of the electronic payment instrument and the means that enable its use.

On receipt of this instrument, the cardholder is expected to sign the card immediately, memorise the PIN and destroy the PIN advice. The cardholder should also ensure that on receipt of a new card (even on renewal) he signs it on the back.

The cardholder must not exceed the credit limit at any time. Any excess of the credit limit is repayable immediately to the bank.

When the limit has been exceeded, the bank is obliged to take remedial actions (such as, for example, blocking further use of the card). However, before it does so, it will check whether there are:

any transactions that have already been debited to the card account;

any transactions that have not yet been debited to the account; and

any authorisations that the bank might have given to a third party in respect of prospective transactions.

The banks could also block the card if repayments fall in arrears.

Notification to the issuer: the cardholder is obliged to notify the issuer immediately in the case of:

loss or theft of the card or of the means which enable it to be used;

the recording in his account of an unauthorised transaction;

any error or irregularity in the maintaining of that account by the issuer; or

any suspicions that the PIN or other code became known by any unauthorised third party.

Countermanding: the cardholder is also bound not to reverse or cancel ("countermand") an order (such as for payment for the purchase of a good or service) which had been given by means of the credit card, except if the amount was not determined when the order was given.

There may be other instances where the cardholder may reverse or cancel a payment. However, he/she is advised to check with the bank when this is possible.

Use of credit cards and debit cards: the cardholder may not use the electronic payment instrument before or after the period for which it is stated to be valid or after any notification of its cancellation or withdrawal to the cardholder by the bank.

(To be concluded)