Cardholder Agreement

What Is a Cardholder Agreement?

A cardholder agreement is a legal document outlining the terms under which a credit card is offered to a customer. Among other provisions, the cardholder agreement states the annual percentage rate (APR) of the card, as well as how the card’s minimum payments are calculated.

How Cardholder Agreements Work

Under the 1968 Truth in Lending Act (TILA), credit card providers are prohibited from making misleading statements about their offerings, and are required to clearly explain the terms and provisions of their credit cards in the cardholder agreement. As such, customers considering accepting a new credit card should carefully review their cardholder agreement in order to confirm that the actual provisions of the card are as advertised.

Although their details vary, most cardholder agreements are written using a similar format and in a straightforward tone. They address key subjects such as the services available to the cardholder; the obligations of the cardholder toward the issuing company; the interest rates, penalties, and other fees that might apply under various circumstances; and the methods in place to handle any disputes between the cardholder and the issuer, should they arise.

In the past, some credit card companies had used vague or confusing language to obscure the true cost and terms of their credit cards. This led to some courts ruling in favor of consumers, who alleged that their credit card provider had made false or misleading claims when advertising their cards. Through consumer protection legislation such as the TILA, credit card customers now benefit from relatively high standards of disclosure and transparency. Nevertheless, reading the cardholder agreement remains an important practice.

Real World Example of a Cardholder Agreement

Mia has been diligently paying off her credit card bill in full each month for several years, and has therefore developed a very high credit rating. One day, she receives a notice in the mail that her credit card company has pre-approved her for a new credit card that features a much higher credit rating. Moreover, the new card also offers various other incentives, including a generous rewards program.

Tempted by these features, Mia decides to consider accepting the new card. Before doing so, however, she thoroughly reviews its cardholder agreement. In it, she discovers that many of the features advertised involve significant associated costs. For example, while the card offers a 5% cash-back program on grocery purchases, it also requires a significant monthly fee and charges penalties if the average monthly balance declines below a certain level.

Given that Mia is careful to maintain relatively modest monthly expenses, she decides that she would be charged the fee for maintaining an insufficient monthly balance. Had she not examined the terms of the cardholder agreement, she may have been forced to pay high and unexpected penalties. Remember, even when dealing with the best rewards credit cards, you should still carefully research your options and review the cardholder agreements.