Feature Articles
Choosing a credit card: Read the fine print
Brenda Procter, M.S., state specialist & instructor, Personal Financial Planning, College of Human Environmental Sciences, University of Missouri Extension
A credit card lets you buy things and pay for them
over time. Using a credit card is like any borrowing —
you have to pay the money back.
Credit card features vary from card to card and there are several types of cards to choose from. To get the best deal, compare fees, charges, interest rates and benefits. Some credit cards that look like a great deal at first may really be a bad deal when you read the terms and conditions of use, and see how the fees could affect your available credit.
Credit card terms
Important terms of use must be disclosed in any
credit card application or for cards that don’t require
an application. Here are the terms to ask about when you
consider credit offers.
Many credit cards charge membership or
participation fees. These fees have a variety
of names, like “annual,” “activation,” “acceptance,”
“participation” and “monthly maintenance” fees. Fees may
appear monthly, periodically or as one-time charges.
They can have an immediate effect on your available
credit. For example, a card with a $250 credit limit and
$150 in fees leaves you with $100 in available credit.
Some credit cards add transaction fees and other
charges if you use them to get a cash advance or
make a late payment; or if you go over your credit
limit.
Annual percentage rate (APR) is a measure of
the cost of credit, expressed as a yearly rate. It must
be disclosed before your account can be activated, and
it must appear on your account statements.
The card issuer also must disclose the “periodic
rate.” That’s the rate the issuer applies to your
balance to determine the finance charge for each billing
period.
Some credit card plans let the issuer change the APR when interest rates or other economic indicators — called indexes — change. The rate change is linked to the index’s performance and often varies. Rate changes can raise or lower the finance charge on your account. Before your account is activated, you must also be given information about any limits on how much and how often your rate may change.
A grace period, also called a “free period,”
lets you avoid finance charges if you pay your balance
in full before the date it is due. Knowing whether a
card gives you a grace period is important if you plan
to pay your account in full each month.
Balance computation method is how the card
issuers calculate your finance charge. If you don’t have
a grace period, it’s important to know this. Which
balance computation method is used can make a big
difference in how much of a finance charge you pay —
even if the APR and your buying patterns stay the same.
Many credit card companies offer incentives for
balance transfer offers — moving your debt from one
credit card to another. All offers are not the same and
the terms may be complicated.
Many credit card issuers offer transfers with low introductory rates. Some issuers also charge balance transfer fees. In addition, if you pay late or fail to pay off your transferred balance before the introductory period ends, the issuer may raise the introductory rate and/or charge you interest retroactively. And if you use your card to make new purchases, payments you make will go toward the balance with the lowest interest rate. Finance charges at the higher interest rate will be assessed on the part of the balance that came from new purchases.
Balance computation methods
The average daily balance method credits your
account from the day the issuer receives your payment.
To figure the balance due, the issuer totals the
beginning balance for each day in the billing period and
subtracts any credits made that day. Although new
purchases may or may not be added to the balance, cash
advances typically are included. The resulting daily
balances are added for the billing cycle. The total is
divided by the number of days in the billing cycle to
get the “average daily balance.”
Adjusted balance is usually the most
advantageous method for cardholders. The issuer
determines your balance 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.
The previous balance is the amount owed at the
end of the previous billing period. Payments, credits
and purchases made during the current billing period are
not included. Some creditors exclude unpaid finance
charges.
Double-cycle balance is when issuers calculate
your balance using your last two month’s account
activity. This approach eliminates the interest-free
period if you go from paying your balance in full each
month to paying only a portion each month of what you
owe.
If you don’t understand how your balance is calculated, ask your card issuer. An explanation also must appear on your billing statements.
Other costs and features
Credit terms vary among issuers. When considering a
credit 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 you use the cash advance feature, pay attention to the APR and balance computation method.
- If you plan to pay for purchases over time, the APR and the balance computation method are major considerations.
You’ll also want to consider if the credit limit is
enough, how widely the card is accepted and the plan’s
services and features.
Your credit card agreement explains what may happen
if you default on your account. For example, if
you are one day late with your payment, your issuer may
be able to take certain actions, including raising the
interest rate on your card. Some issuers’ agreements
even state that if you are in default on any financial
account, those issuers’ will consider you in default for
them as well. This is known as universal default.
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. This is a type of special delinquency rate.
Help and information
Questions about a particular issuer should be sent to
the agency with jurisdiction.
Office of the Comptroller of the Currency
regulates banks with “national” in the name or “N.A.”
after the name:
Office of the Ombudsman
Customer Assistance Group
1301 McKinney Street,
Suite 3450
Houston, TX 77010
toll-free 800-613-6743
www.occ.treas.gov
Board of Governors of the Federal Reserve System
regulates state-chartered banks that are members of the
Federal Reserve System, bank holding companies, and
branches of foreign banks:
Federal Reserve Consumer Help
P.O. Box 1200
Minneapolis, MN 55480
toll-free 888-851-1920
(TTY: 877-766-8533)
ConsumerHelp@FederalReserve.gov
Federal Deposit Insurance Corporation
regulates state-chartered banks that are not members of
the Federal Reserve System:
Division of Supervision and Consumer Protection
550 17th Street, NW
Washington, DC 20429
toll-free 877-ASK-FDIC (275-3342)
National Credit Union Administration regulates
federally chartered credit unions:
Office of Public and Congressional Affairs
1775 Duke Street
Alexandria, VA 22314-3428
703-518-6330
www.ncua.gov
Office of Thrift Supervision regulates federal
savings and loan associations and federal savings banks:
Consumer Programs
1700 G Street, NW
Washington, DC 20552
toll-free 800-842-6929
www.ots.treas.gov
Federal Trade Commission regulates non-bank
lenders:
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
toll-free 877-FTC-HELP (382-4357)
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. To file a complaint or to get free information on consumer issues, visit www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters consumer complaints into a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
References:
Adapted from Choosing a Credit Card: The Deal is in the Disclosures, Federal Trade Commission, June 2008, downloaded December 9, 2008, from http://ftc.gov/bcp/edu/pubs/consumer/credit/cre05.shtm.
Last update: Tuesday, May 05, 2009
 |
Site Administrator: |
|
|
|
