Choosing and Using Credit Cards
are youve 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
A credit card is a form of borrowing that often involves charges.
Credit terms and conditions affect your overall cost. So its
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 youre shopping for a card.
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.
issuer also must disclose the "periodic rate" the
rate applied to your outstanding balance to figure the finance charge
for each billing period.
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 indexs performance,
these plans are called "variable rate" programs. Rate
changes raise or lower the finance charge on your account. If youre
considering a variable rate card, the issuer must also provide various
information that discloses to you:
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.
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 youll have enough time to pay.
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.
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.
Computation Method for the Finance Charge. If you dont have
a free period, or if you expect to pay for purchases over time,
its 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 youll pay even if the APR and your
buying patterns remain relatively constant. See page 10 for examples
of how the methods can affect your costs.
of balance computation methods include the following.
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."
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
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. 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
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.
dont understand how your balance is calculated, ask your card
issuer. An explanation must also appear on your billing statements.
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.
probably also want to consider if the credit limit is high enough,
how widely the card is accepted, and the plans 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.
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
a Credit Card
Federal law prohibits issuers from sending you a card you didnt
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.
Federal law protects your use of credit cards.
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 creditors requirements, or the delay in crediting your
account wont result in a charge.
avoid finance charges, follow the issuers 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.
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 its 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.
on Your Bill. Issuers must follow rules for promptly correcting
billing errors. Youll 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.
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
didnt accept, or for an item that wasnt delivered as
agreed. Of course, you still have to pay any part of the bill thats
not in dispute, including finance and other charges.
decide to dispute a charge:
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.
Charges. If your card is used without your permission, you can be
held responsible for up to $50 per card.
report the loss before the card is used, you cant be held
responsible for any unauthorized charges. If a thief uses your card
before you report it missing, the most youll owe for unauthorized
charges is $50.
your liability, report the loss as soon as possible. Some issuers
have 24-hour toll-free telephone numbers to accept emergency information.
Its 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.
about Merchandise or Services. You can dispute charges for unsatisfactory
goods or services. To do so, you must:
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 dont 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 dont apply, you may want to consider filing
an action in small claims court.
Keep these tips in mind when looking for a credit or charge card.
around for the plan that best fits your needs.
Make sure you understand a plans terms before you accept the
Pay bills promptly to keep finance and other charges to a minimum.
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 cant
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 youll use.
Heres how some different methods of calculating finance charges
affect the cost of credit:
(including new purchases) Average Daily Balance
(excluding new purchases)
Monthly rate 1 1/2% 1 1/2%
APR 18% 18%
Previous Balance $400 $400
New Purchases $50 on 18th day $50 on 18th day
Payments $300 on 15th day $300 on 15th day
(new balance = $100) (new balance = $100)
Average Daily Balance $270 * $250 **
Finance Charge $4.05 (1 1/2% x $270) $3.75 (1 1/2% x $250)
figure average daily balance (including new purchases):
($400 x 15 days) + ($100 x 3 days) + ($150 x 12 days) 30 days =
figure average daily balance (excluding new purchases):
($400 x 15 days) + ($100 x 15 days) 30 days = $250
Adjusted Balance Previous Balance
Monthly rate 1 1/2% 1 1/2%
APR 18% 18%
Previous Balance $400 $400
Payments $300 $300
Average Daily Balance N/A N/A
Finance Charge $1.50 (1 1/2% x $100) $6.00 (1 1/2% x $400)
Questions about a particular issuer should be sent to the agency
Comptroller of the Currency
Compliance Management, Mail Stop 7-5
Washington, DC 20219
Member Banks of the Reserve System
Consumer and Community Affairs
Federal Reserve Board
20th & C Streets, NW
Washington, DC 20551
National Credit Union Administration
1776 G Street, NW
Washington, DC 20456
Federally Insured Banks
Office of Consumer Programs
Federal Deposit Insurance Corporation
550 Seventeenth Street, NW
Washington, DC 20429
Insured Savings and Loans, and Federally Chartered State Banks
Consumer Affairs Program
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Credit Card Issuers
(includes retail/gasoline companies)