Feature Articles
Choosing a credit card: Read the fine print
Brenda Procter, M.S., State Specialist & Instructor, and Graham McCaulley, M.A., Extension Graduate Assistant, 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; however, new credit card rules specify that
fees, such as an annual fee or application fee, cannot total
more than 25 percent of the initial credit limit.
Some credit cards add transaction fees and other charges
if you use them to get a cash advance, if you make a late
payment or if you go over your credit limit. The rule mentioned
above regarding fees being less than 25 percent of the credit
limit does not apply to these type of penalty fees.
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.
If your card does not have a variable interest rate tied to an index, the credit card companies generally cannot raise your APR for the first 12 months after you open your account, and if the rate is going to be raised after that point, you should be given 45 days notice and the opportunity to cancel the card before the new rate takes effect.
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. When you make payments, they are to be directed to highest interest balances first.
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.
Credit card companies can only impose interest charges on balances in the current billing cycle (i.e., no two-cycle billing). 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.
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Last update: Tuesday, October 12, 2010
