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.
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 months' 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 possible 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.
|Average Daily Balance||including
|Monthly rate||1 1/2%||1 1/2%|
|Purchases on 18th day||Purchases on 18th day|
|Payments on 15th day||$300||$300|
|Average Daily Balance||$270||$270|
|Charge||1 1/2% x $270||1 1/2% x $270|
|To figure average
|(including new purchases):
($400 x 15 days) +
($100 x 3 days)+
($150 x 12 days)/30 days
|(excluding new purchases):|
($400 x 15 days) +
($100 x 15 days)/30 days
|Adjusted Balance||Previous Balance|
|Monthly rate||1 1/2%||1 1/2%|
|Average Daily Balance||N/A||N/A|
|Charge||1 1/2% x $100||1 1/2% x $400|
The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them.
A credit card, such as VISA or MasterCard, allows you to pay for sales or services by borrowing against your line of credit with the credit card company and to make monthly payments on the outstanding balance. A charge card, such as American Express requires payment in full each minimum the outstanding balance charged to the account.
What Are the Advantages of Using a Credit Card?
They allow you to make purchases on credit without carrying around a lot of cash.
They allow accurate record-keeping by consolidating purchases into a single statement.
They allow convenient ordering by mail or phone.
They allow you to pay for large purchases in small, monthly installments.
Under certain circumstances, they allow you to withhold payment for merchandise which proves defective.
What Are the Disadvantages?
The ease of using credit cards, combined with impulsive buying, may result in over-spending.
High interest rates, as well as other costs make credit cards a relatively expensive method of obtaining credit.
Lost or stolen cards may result in some expense ($50.00) and inconvenience.
The use of multi-credit cards can get you even further into debt.
Fraudulent or unauthorized charges may take months to dispute, investigate, and resolve.
How Do I Get a Credit Card?
You must complete an application. A credit card cannot be issued unless requested. Issuers often acquire names of consumers with good credit ratings from a credit reporting agency and send the consumers "preapproved" applications.
Card issuers are permitted to mail you an application or a solicitation for a credit card or to ask you by phone whether you want to receive a card and to send you a card if you say yes. An issuer will consider your employment, current assets, current debts, and credit history when you apply for a credit or charge card. If you have had a poor credit history, some companies will issue you a "Secured" credit card. The issuer requires you deposit money in an account and allows you to make credit purchases up to the amount on deposit. Consumers who wish to use such plans to rebuild their credit record should make certain that the deposits are held in a protected escrow account.
How Does a Credit Card Work?
When you have been issued a credit card you are given a line of credit. You can make purchases or receive cash advances up to that amount with your card. When you make a purchase, the merchant gives proof of your purchase to the credit card company and they pay the merchant on your behalf; in effect granting you a loan. The credit card issuer then bills you for reimbursement of the purchase or cash advance amount. You can either pay the balance in the minimum payment due date it is due or the periodic interest rate on unpaid balances.
What Are My Credit Card Protections?
Federal law protects consumers when they use credit cards. Protections include the following items:
Prompt Credit for Payments. A card issuer must credit your account on the day the issuer receives your payment, unless the payment is not made according to the creditor's requirements or the delay in crediting your account does not result in a charge.
Refunds of Credit Balances. When you return merchandise or pay more than you owe, you have the option of keeping the credit balance on your account or requesting a refund. To obtain a refund write the card issuer. The card issuer must send you the refund within seven business days of receiving your request. Also if a credit balance remains on your account for more than six months, the card issuer must make a good faith effort to refund the credit balance.
Errors on Your Bill. There are specific rules that the card issuer must follow for promptly correcting billing errors. The issuer must furnish you a statement describing the rules when you open a credit card account and at least once a year after that. Many issuers print your rights on their monthly billing statements. You must notify the issuer in writing at the address specified for billing errors within 60 days after the first bill containing the error was mailed to you. The issuer must look into the problem and either correct the error or explain to you why the bill is correct not later than 90 days after the issuer receives your billing error notice. During that period you do not have to pay the disputed amount or interest on that amount.
Unauthorized Charges. If your credit card is used without your authorization, you can be held liable for up to $50 per card. If you report the loss before the card is used, federal law says the card issuer cannot hold you responsible for any unauthorized charges. If you have a lost or stolen credit card, report the loss as soon as possible. Most issuers have a toll-free number in service 24 hours. You should follow-up your phone call with a letter.
Disputes About Merchandise or Services. If you have a problem with merchandise or services that you charged to a credit card and have made a good faith effort to work out the problem with the seller, you have the right to withhold from the card issuer payment for the merchandise or services. If the card you used is a bank card or another card not issued by the seller of the defective merchandise, you can withhold payment only if the purchase exceeded $50 and occurred in your home state or within 100 miles of your billing address.
What Should I Do If My Credit Cards Are Lost or Stolen?
Phone the credit card company immediately, and report that your card is lost or stolen. Your monthly billing statement will list the phone number for reporting lost cards. Be sure to get the name of the person you talked to. The issuer will cancel your card so no unauthorized charges can be made on it. To create a record for the company and for your own files, write to the company after you have phoned. Include your name, address, account number, the date you believe the card was lost or stolen, and the name of the person you spoke to when you called the company.
You will not be liable if you notify your issuer that your cards were lost or stolen before unauthorized charges are made. If your cards are used before you report them missing, the most you can be liable for is $50 per account.
Make sure you understand the terms of a credit card plan before you accept the card. Review the disclosures of terms and fees that must appear on credit-card offers.
Keep copies of sales slips and promptly compare charges when your bills arrive. Pay bills promptly.
Protect your credit cards and account numbers to prevent unauthorized use. Draw a line through blank spaces above the total when you sign receipts. Rip up or retain carbons.
Do not give out your card number over the phone unless you know the business or unless you initiated the call.
Keep a list of your credit card numbers and the telephone numbers of each card issuer in a safe place in case your cards are lost or stolen.
Shopping Is the First Step
Credit is a convenience. It lets you charge a meal on your credit card, pay for an appliance on the installment plan, get a loan to buy a house, or pay for schooling and vacations. With credit, you can enjoy your purchase while you're paying for it, or you can make a purchase when you're lacking ready cash.
But there are strings attached to credit as well. It usually costs something. And, of course, what is borrowed must be paid back. If you are thinking of borrowing or opening a credit account, your first step should be to figure out how much it will cost you and whether you can afford it. Then you should shop for the best terms.
What Laws Apply?
Two laws can help you compare costs:
Truth in Lending requires creditors to give you certain basic information about the cost of buying on credit or taking out a loan. These disclosures can help you shop for the best deal.
Consumer Leasing disclosures can help you compare the cost and terms of one lease with another and with the cost and terms of buying for cash or on credit.
The Finance Charge and Annual Percentage Rate
Credit costs vary. By remembering two terms - the finance charge and the annual percentage rate (APR) - you can compare credit prices from different sources. Under Truth in Lending, the creditor must tell you in writing and before you sign any agreement what these terms will be.
The finance charge is the total dollar amount you pay to use credit. It includes interest costs and other costs, such as service charges and some credit-related insurance premiums.
Example: Suppose you borrow $100 for one year, and the interest is $10. If there is a service charge of $1, the finance charge will be $11.
The annual percentage rate is the percentage cost (or relative cost) of credit on a yearly basis, which is your key to comparing costs, regardless of the amount of credit or how long you have to repay it.
Example: Again, suppose you borrow $100 for one year and pay a finance charge of $10. If you can keep the entire $100 for the whole year and then repay $110 at year's end, you are paying an APR of 10 percent. But if you repay the $100 and finance charge (a total of $110) in twelve equal monthly installments, you don't really get to use $100 for the whole year. In fact, you get to use less and less of that $100 each month. In this case, the $10 finance charge amounts to an APR of 18 percent.
All creditors banks, stores, car dealers, credit card companies, finance companies must state the cost of their credit in terms of the finance charge and the APR. Federal law does not set interest rates or other credit charges. But it does require their disclosure so that you can compare credit costs. The law says these two pieces of information must be shown to you before you use a credit card.
Even when you understand the terms a creditor is offering, it's easy to underestimate the difference in dollars that different terms can make. Suppose you're buying a $7,500 car. You put $1,500 down and need to borrow $6,000. Compare the three credit arrangements in the chart on the next page. How do these choices compare? The answer depends partly on what you need. The lowest cost loan, in terms of total finance charges and total of payments, is available from Creditor A.
|APR||Lengthof Loan||Monthly Payment||Total Finance Charge||Total of Payments|
|Creditor A||14%||3 years||$205.07||$1,382.52||$7,382,52|
|Creditor B||14%||4 years||$163.96||$1,870.08||$7,870.08|
|Creditor C||15%||4 years||$166.98||$2,015.04||$8,015.04|
If you were looking for lower monthly payments, you could get them by repaying the loan over a longer period. However, you would have to pay more in total costs. A loan from Creditor B, also at a 14 percent APR, but for four years, will add about $488 to your finance charge.
If that four-year loan were available only from Creditor C, the APR of 15 percent would add another $145 or so to your finance charges, compared with Creditor B.
Other factors, such as the size of the down payment, will also make a difference. Be sure to look at all the loan terms before you choose.
Cost of Open-end Credit
Open-end credit includes bank and department store credit cards, gasoline company cards, home equity lines of credit, and check-overdraft accounts that let you write checks for more than your actual balance with the bank. Open-end credit can be used again and again, generally until you reach a certain prearranged borrowing limit. Truth in Lending requires that open-end creditors tell you the terms of the credit plan so that you can shop and compare costs.
When you're shopping for an open-end plan, the APR is only the periodic rate that you will be charged, figured on a yearly basis. (For instance, a creditor that charges 12 percent interest each month would quote you an APR of 18 percent.) Annual membership fees, transaction charges, and points, for example, are listed separately; they are not included in the APR. Keep these fees in mind and compare all the costs involved in the plans, not just the APR.
Creditors must tell you when finance charges begin on your account, so you know how much time you have to pay your bill before a finance charge is added. Creditors may give you a 25-day grace period, for example, to pay your purchase balance in full before you must pay a finance charge.
Creditors also must tell you the method they use to figure the balance on which you pay a finance charge; the interest rate they charge is applied to this balance to compute the finance charge. Creditors use a number of different methods to arrive at the balance. Study them carefully; they can significantly affect your finance charge.
Some creditors, for instance, take the amount you owed at the start of the billing cycle and subtract any payments made during that cycle. New purchases are not counted. This is called the adjusted balance method.
With the previous balance method, creditors simply use the amount owed at the start of the billing cycle to compute the finance charge.
Under one of the most common methods, the average daily balance method, creditors add your balances for each day in the billing cycle and then divide that total by the number of days in the cycle. Payments made during the cycle are subtracted to get the daily amounts, and depending on the plan, new purchases may or may not be included. Under another method, the two-cycle average daily balance method, creditors use the average daily balances for two billing cycles to compute your finance charge. Again, payments will be subtracted to get the balances, but new purchases may or may not be included.
Be aware that the amount of the finance charge will vary considerably depending on the method used, even for the same pattern of purchases and payments.
If you receive a credit card offer or an application, the creditor must give you information about the APR and other important terms of the plan (for example, annual fees and late payment fees) at that time. Likewise, with a home equity line of credit, this information must be given to you with an application.
Truth in Lending does not set the rates or tell the creditor how to calculate finance charges, it requires only that the creditor tell you the method that it uses. You should ask for an explanation of any terms you don't understand.