What better way to build a lasting relationship with a customer than to allow them to receive services or goods now in exchange for a promise to pay them later? After all, extending consumer credit typically means you’ll get more customers looking to purchase your products or services, boosts your product/service’s reputation, increases sales, and gives you an edge over the competition.
While this may sound like a win-win situation for business owners, if you’re considering the possibility of extending credit to eligible customers, you’re going to need to consider the matter realistically. You’ll need to discern how it may impact your business and your customers in its entirety to ensure that you’re making an informed decision.
Consumer Credit Laws: Is Your Business in Compliance?
Before you decide to offer credit to your customers, it’s important to know the law. Failure to comply with federal (and local) laws could result in the demise of your business or at the very least fines and lost credibility. The government has laws in place that are designed to protect the consumers (and businesses that comply) and keep them better informed as it pertains to their credit purchases. If you’re going to extend credit to your customers, you will need to be aware of five federal consumer credit laws.
1. Truth in Lending – under this act, business are required to provide your customers with accurate credit terms. It also regulates how credit opportunities can be advertised. Your credit offers must clearly point out finance charges, interest rates, payment due dates, total costs of purchase, and any other fees or late charges that can be assessed.
How This Helps Your Business: When in compliance with the truth in lending act, businesses can cut down on the fraudulent claims from consumers. For example, if a consumer makes a claim that they were unaware of what they were signing, how much it would costs or even how fees were assessed your business is protected against any fines and the consumer is held liable for repaying the debt.
2. Fair Credit Billing– this act spells out what businesses must do in the event that a customer claims they’ve been improperly billed. If a customer sends in notification that they dispute a charge (within 60 days of receiving the bill), you as a business are required to send a response that details why the charges were accurate or a revised bill having removed the charges.
How This Helps Your Business: Mistakes happen all the time. Maybe a staff member transposed the numbers and charged the wrong amount, OR maybe the amount you billed was 100% accurate and the customer is mistaken. Either way, this act is put into place to provide protection for both parties.
In the event that the customer was wrong, if you haven’t completed the requirements under this act, you run the risk of having to give the customer a credit on their account (even if the billed amount was accurate). It also protects you in the event that the customer researches and consults a credit repair company to dispute the charges later. Your response letters and supporting evidence go a long way in making sure that the customer doesn’t get out of paying what is owed to you.
3. Equal Credit Opportunity– this act simply states that no business is allowed to discriminate on who they offer credit to based on their race, gender, religion, national origin, or marital status.
How This Helps Your Business: The act also provides certain factors that businesses can use to determine eligibility for credit. This protects your business from the various risks of extending credit to an unreliable consumer. While it’s not foolproof, using legitimate factors such as credit rating and financial circumstances can minimize the potential for unpaid balances.
4. Fair Credit Reporting– this act essentially provides consumers with protection as it pertains to information reported to credit bureaus. It prevents businesses from reporting inaccurate information that would otherwise tarnish an applicant’s credit status.
How This Helps Your Business: Reporting inaccurate information on a customer’s credit report could result in serious repercussions. As long as you’re in compliance with this act, it keeps you have documented proof that you’ve reported only accurate information as it pertains to the account holder.
5. Fair Debt Collection Practices – this act touches on collection practices that are considered illegal, harassing, and abusive to consumers. With all the various scams out there, it protects consumers against the potential of paying a fraudulent company.
How This Helps Your Business: Not every customer is going to repay the credit in a timely fashion. When it’s time to collect money that is owed to your business, it can be tempting to do and say whatever you feel might get the customer to repay the outstanding balance. The only trouble is, if you decide to go renegade on your consumers you could end up being hit with a hefty fine that surpasses the amount owed to you. Therefore, by remaining in compliance and avoiding such illegal collection practices, you can continue to collect your debt and avoid the financial burden of fines and lawsuits.
The Federal Trade Commission mandates consumer credit laws as a means for protecting their credit against fraudulent businesses and business practices. However, what is often overlooked is that when in compliance with these laws, businesses can also do a great deal to protect themselves and their own personal/business credit.
There’s certainly nothing wrong with offering customers credit when they don’t have the means to purchase your products or services outright, however, neglecting to comply with the laws described above can leave you on the bad end of a bargain. Don’t wait until you receive a complaint or court summons to decide to make the necessary changes. Ensuring that you’re in compliance is not only beneficial to you, but it goes a long way in showing your customers that you too care about their credit and doing things the right way.
Written by Jane Brown
