Credit
Cards:
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:
This is used 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 10 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.
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