What is the Truth in Lending Act and How Does it Apply to Credit Cards?

Celebrated American philosopher and poet Henry David Thoreau never used credit in his life. I’d like to believe he didn’t use credit because it would have conflicted with his simple lifestyle. But the reality is that credit cards didn’t exist until many years after his death in 1862.

Though he didn’t own a credit card, I think the Truth in Lending Act would have been right up Thoreau’s alley. He once wrote, “Rather than love, than money, than fame, give me truth.”

The Truth in Lending Act (TILA) adheres to that philosophy by ensuring that loan providers and credit card issuers provide borrowers with comprehensive information about their lending products. 

The Truth in Lending Act (TILA) ensures that lenders and credit card issuers supply borrowers with comprehensive information about the lending products they offer. 

The Truth in Lending Act’s emphasis on transparency in lending might have appealed to famed American philosopher and poet Henry David Thoreau’s preference for truth over money.

Loan terms can be complex, abounding with acronyms and interest calculations. Without the Truth in Lending Act, lenders may be tempted to prioritize profits at all costs, even above the truth. The act applies to many forms of consumer credit, such as auto loans and mortgages, but for the purposes of this article, I’ll mostly focus on how the Truth in Lending Act applies to credit cards and how it helps you understand what you’re signing up for.

When I was a kid, I thought credit cards were a form of magic because they let you buy stuff without having to fork over real money, also known as paper currency. Though not magical, the Truth in Lending Act does shield borrowers from dangerous lending practices via disclosure requirements and other safeguards.

I’ll get into more specific aspects of the Truth in Lending Act in the following sections, but keep in mind that the Act generally only applies to consumer credit and not credit issued to businesses or government agencies. 

Disclosure Requirements for Credit Cards

You were probably excited when you were approved for your first credit card. Unfortunately, some of that excitement was likely replaced by confusion when you received your new credit card in the mail. 

Sure, it was great to see your name emblazoned on a shiny piece of plastic that amplified your purchasing power. But the envelope containing your card probably also included a slew of documents full of financial language in small print. Credit card issuers provide their customers with disclosures that cover a number of items the Truth in Lending Act requires them to clearly communicate to cardholders, including:

• Annual Percentage Rate (APR): Card issuers must clearly communicate a card’s APR, or interest rate, to cardholders, including the rates for balance transfers, cash advances, and purchases. If a card includes a promotional rate, the issuer must state when the promotional rate ends and what the card’s rate will shift to at that time. For cards that come with variable rates, card companies need to inform borrowers of the details that could cause the card’s rate to change.
• Fees and Penalties: Credit cards can come with a lot of fees, hopefully you haven’t learned that the hard way. Be proactive and learn what fees your card issuer may charge you, including any annual fees, charges for late payments, and foreign transaction fees, which are all detailed in your card’s disclosures.
• Credit Card Terms: Issuers include key details about your card that can help you manage your card and avoid extra charges. These terms include how monthly minimum payment amounts are computed and your card’s credit limit, which spells out how much money you can access with your card. Your payment due date will also be disclosed within disclosures.

Additional Protections

In addition to spelling out your credit card’s APR and terms, the TILA also mandates some defenses that can help you out when you get in a card-related jam, including:

• Rights to Dispute Charges: If you ever have a charge show up on your billing statement that you don’t recognize, you’ll be happy to know that the Truth in Lending Act provides you with the right to challenge transactions you didn’t authorize. Notify your card issuer of any such instances, and they will investigate your claims and work to resolve the issue. 
• Limits on Liability for Fraudulent Charges: When you spot a fraudulent charge on your bill, be sure to report it to your credit card issuer as soon as you can. Due to the Truth in Lending Act, when you report fraudulent charges in a timely fashion, you’ll only have to pay up to $50 for them. Check with your issuer about this because some of them don’t hold cardholders liable for any portion of fraudulent transactions.
• Grace Periods and Billing Cycles: Per the Truth in Lending Act, creditors must disclose how long their billing cycles are and any grace period they extend to borrowers. A grace period is the span of time that you can pay your card’s full balance without being charged interest.

One of life’s lessons we learn when we’re growing up is that our actions can have consequences. If you ignore your credit card bills and don’t send in your payments by their due date, you could face additional fees and a possible dent or two in your credit score. 

Credit card issuers also must be responsible for disclosing information to borrowers, or they risk being hit with fines and other penalties.

Details Issuer Responsibilities

The good news for consumers is that the onus is on credit card companies to follow the rules spelled out in the Truth in Lending Act. Card issuers must provide cardholders with the following items to comply with the Act:

• Clear and Conspicuous Disclosures: The disclosures card issuers provide to borrowers must be clearly written and contain accurate information about the items covered above, including APRs and fees. Disclosures must also be presented in a clear way to cardholders. That means you won’t have to break out your decoder ring to understand your card’s disclosure or translate it into English from Klingon.
• Periodic Statements: Card companies must provide periodic, written statements to their customers that include details about their credit card activity that month, including a list of transactions they completed with their card. Statements must also detail your total outstanding balance, payment due dates, and the minimum payment needed to sidestep any late fees. Other information, including your card’s interest rates, how they’re calculated, and any fees you were charged during a billing cycle, will also appear on your statement. 
• Changes in Terms Notice and Options: They say that the only constant in life is change, and changes can apply to your credit card terms, too. Card issuers can adjust interest rates, fees, and other components of your card at times, but thanks to the Truth in Lending Act, you won’t be left in the dark. 

When you receive a change in terms notice, review it carefully and decide whether your credit card is one that you want to keep using. If it isn’t, you can decline to accept the changes but know that your card issuer may cancel your account as a result.

Penalties for Non-Compliance

The requirements contained in the Truth in Lending Act aren’t suggestions — card issuers must follow them. If they don’t, they may face penalties, including:

• Lawsuits: Cardholders who’ve been harmed by an issuer’s failure to comply with the Truth in Lending Act may sue them to seek financial compensation. And if word gets out that an issuer isn’t playing by industry rules, that issuer may also incur damage to its reputation.
• Fines: Regulatory agencies, including the CFPB, may issue fines to card companies that don’t follow the directives of the Truth in Lending Act.
• Fee Reimbursement: Card issuers that are found to have improperly charged fees to their customers may be directed to reimburse cardholders.
• Enhanced Regulatory Oversight: Issuers that continually defy the act’s requirements may face heightened scrutiny from the Consumer Financial Protection Bureau and other regulating bodies.

The Truth in Lending Act motivates credit card companies to treat cardholders fairly. One commonality among the four bullet points above is that they can all cost issuers money. Sure, credit card companies provide a valuable service, but they’re businesses after all, and businesses don’t like to lose money.

The late ‘60s were a pivotal time in the U.S. Things that we take for granted today were just being introduced then. Americans munched on Big Macs from coast to coast and tried to decode what “The White Album” was all about for the first time in 1968.

In 1968, the Truth in Lending Act was also enacted into federal law. By stipulating that lenders follow certain rules when offering consumer products, the Act helps people understand what they’re getting into when they apply for a loan or credit card. 

Credit solutions are an essential piece of the U.S. economic machine, and keeping borrowers informed about all they entail makes people more comfortable using them.

Though the Truth in Lending Act has been updated many times since 1968, it remains a tool that can keep borrowers safe from deceptive lending schemes. Initially overseen by the Federal Reserve Board, the Consumer Financial Protection Bureau (CFPB) has had authority over the Truth in Lending Act since 2011. 

Government oversight gets a bad rap at times. But the next time you sit down at a new restaurant, consider whether you would have chosen to eat there if it wasn’t required to follow certain safety regulations to sell food to the public. The Truth in Lending Act protects borrowers like the Food and Drug Administration safeguards diners.

Whether you’re considering applying for your first credit card or you’ve owned many, the protections the Truth in Lending Act provides should increase your confidence in using credit products. Take the time to read the disclosures, notices, and other communications your issuer sends you. Sure, they may not be as fascinating as Thoreau’s “Walden,” but you’ll become a more educated cardholder.