Choosing and Using Credit Cards
Chances are you've gotten your share
of "pre-approved" credit card offers in the
mail, some with low introductory rates and other perks.
Many of these solicitations urge you to accept "before
the offer expires." Before you accept, shop around
to get the best deal.
Credit Card
Terms
A credit card is a form of borrowing that often involves
charges. Credit terms and conditions affect your overall
cost. So it's wise to compare terms and fees before
you agree to open a credit or charge card account. The
following are some important terms to consider that
generally must be disclosed in credit card applications
or in solicitations that require no application. You
also may want to ask about these terms when you're shopping
for a card.
Annual Percentage
Rate. The APR is a measure of the cost of credit,
expressed as a yearly rate. It also must be disclosed
before you become obligated on the account and on your
account statements.
The card issuer also must disclose
the "periodic rate" - the rate applied to
your outstanding balance to figure the finance charge
for each billing period.
Some credit card plans allow the issuer
to change your APR when interest rates or other economic
indicators - called indexes - change. Because the rate
change is linked to the index's performance, these plans
are called "variable rate" programs. Rate
changes raise or lower the finance charge on your account.
If you're considering a variable rate card, the issuer
must also provide various information that discloses
to you:
- that the rate may change; and
- how the rate is determined - which index is used
and what additional amount, the "margin,"
is added to determine your new rate.
At the latest, you also must receive
information, before you become obligated on the account,
about any limitations on how much and how often your
rate may change.
Free Period.
Also called a "grace period," a free
period lets you avoid finance charges by paying your
balance in full before the due date. Knowing whether
a card gives you a free period is especially important
if you plan to pay your account in full each month.
Without a free period, the card issuer may impose a
finance charge from the date you use your card or from
the date each transaction is posted to your account.
If your card includes a free period, the issuer must
mail your bill at least 14 days before the due date
so you'll have enough time to pay.
Annual Fees.
Most issuers charge annual membership or participation
fees. They often range from $25 to $50, sometimes up
to $100; "gold" or "platinum" cards
often charge up to $75 and sometimes up to several hundred
dollars.
Transaction
Fees and Other Charges. A card may include other
costs. Some issuers charge a fee if you use the card
to get a cash advance, make a late payment, or exceed
your credit limit. Some charge a monthly fee whether
or not you use the card.
Balance
Computation Method for the Finance Charge. If
you don't have a free period, or if you expect to pay
for purchases over time, it's important to know what
method the issuer uses to calculate your finance charge.
This can make a big difference in how much of a finance
charge you'll pay - even if the APR and your buying
patterns remain relatively constant. See page 4 for
examples of how the methods can affect your costs.
Examples of balance computation
methods include the following.
Average
Daily Balance. This is the most common calculation
method. It credits your account from the day payment
is received by the issuer. To figure the balance due,
the issuer totals the beginning balance for each day
in the billing period and subtracts any credits made
to your account that day. While new purchases may or
may not be added to the balance, depending on your plan,
cash advances typically are included. The resulting
daily balances are added for the billing cycle. The
total is then divided by the number of days in the billing
period to get the "average daily balance."
Adjusted
Balance. This is usually the most advantageous
method for card holders. Your balance is determined
by subtracting payments or credits received during the
current billing period from the balance at the end of
the previous billing period. Purchases made during the
billing period aren't included.
This method gives you until the end
of the billing cycle to pay a portion of your balance
to avoid the interest charges on that amount. Some creditors
exclude prior, unpaid finance charges from the previous
balance.
Previous
Balance. This is the amount you owed at the end
of the previous billing period. Payments, credits and
new purchases during the current billing period are
not included. Some creditors also exclude unpaid finance
charges.
Two-cycle
Balances. Issuers sometimes use various methods
to calculate your balance that make use of your last
two month's account activity. Read your agreement carefully
to find out if your issuer uses this approach and, if
so, what specific two-cycle method is used.
If you don't understand how your balance
is calculated, ask your card issuer. An explanation
must also appear on your billing statements.
Other Costs
and Features
Credit terms vary among issuers. When shopping for a
card, think about how you plan to use it. If you expect
to pay your bills in full each month, the annual fee
and other charges may be more important than the periodic
rate and the APR, if there is a grace period for purchases.
However, if you use the cash advance feature, many cards
do not permit a grace period for the amounts due - even
if they have a grace period for purchases. So, it may
still be wise to consider the APR and balance computation
method. Also, if you plan to pay for purchases over
time, the APR and the balance computation method are
definitely major considerations.
You'll probably also want to consider
if the credit limit is high enough, how widely the card
is accepted, and the plan's services and features. For
example, you may be interested in "affinity cards"
- all-purpose credit cards sponsored by professional
organizations, college alumni associations and some
members of the travel industry. An affinity card issuer
often donates a portion of the annual fees or charges
to the sponsoring organization, or qualifies you for
free travel or other bonuses.
Special
Delinquency Rates. Some cards with low rates
for on-time payments apply a very high APR if you are
late a certain number of times in any specified time
period. These rates sometimes exceed 20 percent. Information
about delinquency rates should be disclosed to you in
credit card applications or in solicitations that do
not require an application.
Receiving
a Credit Card
Federal law prohibits issuers from sending you a card
you didn't ask for. However, an issuer can send you
a renewal or substitute card without your request. Issuers
also may send you an application or a solicitation,
or ask you by phone if you want a card - and, if you
say yes, they may send you one.
Cardholder
Protections
Federal law protects your use of credit cards.
Prompt Credit
for Payment. An issuer must credit your account
the day payment is received. The exceptions are if the
payment is not made according to the creditor's requirements,
or the delay in crediting your account won't result
in a charge.
To help avoid finance charges, follow
the issuer's mailing instructions. Payments sent to
the wrong address could delay crediting your account
for up to five days. If you misplace your payment envelope,
look for the payment address on your billing statement
or call the issuer.
Refunds
of Credit Balances. When you make a return or
pay more than the total balance at present, you can
keep the credit on your account or write your issuer
for a refund - if it's more than a dollar. A refund
must be issued within seven business days of receiving
your request. If a credit stays on your account for
more than six months, the issuer must make a good faith
effort to send you a refund.
Errors on
Your Bill. Issuers must follow rules for promptly
correcting billing errors. You'll get a statement outlining
these rules when you open an account and at least once
a year. In fact, many issuers include a summary of these
rights on your bills.
If you find a mistake on your bill,
you can dispute the charge and withhold payment on that
amount while the charge is being investigated. The error
might be a charge for the wrong amount, for something
you didn't accept, or for an item that wasn't delivered
as agreed. Of course, you still have to pay any part
of the bill that's not in dispute, including finance
and other charges.
If you decide to dispute a
charge:
- Write to the creditor at the address indicated on
your statement for "billing inquiries."
Include your name, address, account number, and a
description of the error.
- Send your letter soon. It must reach the creditor
within 60 days after the first bill containing the
error was mailed to you.
The creditor must acknowledge your
complaint in writing within 30 days of receipt, unless
the problem has been resolved. At the latest, the dispute
must be resolved within two billing cycles, but not
more than 90 days.
Unauthorized
Charges. If your card is used without your permission,
you can be held responsible for up to $50 per card.
If you report the loss before
the card is used, you can't be held responsible
for any unauthorized charges. If a thief uses your card
before you report it missing, the most you'll owe for
unauthorized charges is $50.
To minimize your liability, report
the loss as soon as possible. Some issuers have 24-hour
toll-free telephone numbers to accept emergency information.
It's a good idea to follow-up with a letter to the issuer
- include your account number, the date you noticed
your card missing, and the date you reported the loss.
Disputes
about Merchandise or Services. You can dispute
charges for unsatisfactory goods or services. To do
so, you must:
- have made the purchase in your home state or within
100 miles of your current billing address. The charge
must be for more than $50. (These limitations don't
apply if the seller also is the card issuer or if
a special business relationship exists between the
seller and the card issuer.) and,
- first make a good faith effort to resolve the dispute
with the seller. No special procedures are required
to do so.
If these conditions don't apply, you
may want to consider filing an action in small claims
court.
Shopping
Tips
Keep these tips in mind when looking for a credit or
charge card.
- Shop around for the plan that best fits your needs.
- Make sure you understand a plan's terms before you
accept the card.
- Hold on to receipts to reconcile charges when your
bill arrives.
- Protect your cards and account numbers to prevent
unauthorized use. Draw a line through blank spaces
on charge slips so the amount can't be changed. Tear
up carbons.
- Keep a record - in a safe place separate from your
cards - of your account numbers, expiration dates
and the phone numbers of each issuer to report a loss
quickly.
- Carry only the cards you think you'll use.
For Help
and Information
Questions about a particular issuer should be sent to
the agency with jurisdiction.
National Banks
Comptroller of the Currency
Compliance Management, Mail Stop 7-5
Washington, DC 20219
State Member Banks of the
Reserve System
Consumer and Community Affairs
Federal Reserve Board
20th & C Streets, NW
Washington, DC 20551
Federal Credit Unions
National Credit Union Administration
1776 G Street, NW
Washington, DC 20456
Non-Member Federally Insured
Banks
Office of Consumer Programs
Federal Deposit Insurance Corporation
550 Seventeenth Street, NW
Washington, DC 20429
Federally Insured Savings
and Loans, and Federally Chartered State Banks
Consumer Affairs Program
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Other Credit Card Issuers
(includes retail/gasoline companies)
Consumer Response Center
Federal Trade Commission
Washington, DC 20580
Here’s how some different
methods of calculating finance charges affect the cost
of credit:
|
Average
Daily Balance
(including new purchases)
|
Average
Daily Balance
(excluding new purchases)
|
Monthly rate |
1 ½% |
1 ½% |
APR |
18% |
18% |
Previous Balance |
$400 |
$400 |
New Purchases |
$50 on 18th day |
$50 on 18th day |
Payments |
$300 on 15th day
(new balance = $100) |
$300 on 15th day
(new balance = $100) |
Average Daily Balance |
$270* |
$250* |
Finance Charge |
$4.05
(1 ½% x $270) |
$3.75
(1 ½% x $250) |
* To figure average daily balance
(including new purchases): ($400 x 15 days) + ($100
x 3 days) + ($150 x 12 days)/30 days = $270
** To figure average daily balance
(excluding new purchases): ($400 x 15 days) + ($100
x 15 days)/30 days = $250
|
Adjusted
Balance |
Previous
Balance |
Monthly rate |
1½% |
1 ½% |
APR |
18% |
18% |
Previous Balance |
$400 |
$400 |
Payments |
$300 |
$300 |
Average Daily Balance |
N/A |
N/A |
Finance Charge |
$1.50
(1 ½% x $100) |
$6.00
(1 ½% x $400) |
|