Credit Card Terms
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:
- The rate may change
- 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. See page 4 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.
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
responsible 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.
For Help and Information
Questions about a particular issuer should be sent to the agency with
jurisdiction.
National Banks
Comptroller of the Currency
Compliance Management, Mail Stop 7-5
Washington, DC 20219
State Member Banks of the Reserve System
Consumer and Community Affairs
Federal Reserve Board
20th & C Streets, NW
Washington, DC 20551
Federal Credit Unions
National Credit Union Administration
1776 G Street, NW
Washington, DC 20456
Non-Member Federally Insured Banks
Office of Consumer Programs
Federal Deposit Insurance Corporation
550 Seventeenth Street, NW
Washington, DC 20429
Federally Insured Savings and Loans, and
Federally Chartered State Banks
Consumer Affairs Program
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Other Credit Card Issuers
(includes retail/gasoline companies)
Consumer Response Center
Federal Trade Commission
Washington, DC 20580
Here’s how some different methods of
calculating finance charges affect the cost of credit:
|
|
Average Daily Balance
(including new purchases)
|
Average Daily Balance
(excluding new purchases)
|
|
Monthly rate
|
1 ½%
|
1 ½%
|
|
APR
|
18%
|
18%
|
|
Previous Balance
|
$400
|
$400
|
|
New Purchases
|
$50 on 18th day
|
$50 on 18th day
|
|
Payments
|
$300 on 15th day
(new balance = $100)
|
$300 on 15th day
(new balance = $100)
|
|
Average Daily Balance
|
$270*
|
$250*
|
|
Finance Charge
|
$4.05
(1 ½% x $270)
|
$3.75
(1 ½% x $250)
|
* To figure average daily balance (including new
purchases): ($400 x 15 days) + ($100 x 3 days) + ($150 x 12 days)/30
days = $270
** To figure average daily balance (excluding new
purchases): ($400 x 15 days) + ($100 x 15 days)/30 days = $250
|
|
Adjusted Balance
|
Previous Balance
|
|
Monthly rate
|
1½%
|
1 ½%
|
|
APR
|
18%
|
18%
|
|
Previous Balance
|
$400
|
$400
|
|
Payments
|
$300
|
$300
|
|
Average Daily Balance
|
N/A
|
N/A
|
|
Finance Charge
|
$1.50
(1 ½% x $100)
|
$6.00
(1 ½% x $400)
|
|