Choosing and Using Credit
Chances are you’ve 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 best deal.
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
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
- 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
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 10 for examples of how the methods can affect your
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
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
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
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
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
Receiving a Credit
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.
Federal law protects your use of credit
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
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
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
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.
Keep these tips in mind when looking for a credit or
- Shop around for the plan that best fits your needs.
- Make sure you understand a plan’s terms before you accept the card.
- 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 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.
Here’s how some different methods of calculating finance
charges affect the cost of credit:
For Help and
(including new purchases)
(excluding new purchases)
||$50 on 18th day
||$50 on 18th day|
||$300 on 15th day
||$300 on 15th day|
||(new balance = $100)
||(new balance = $100)|
|Average Daily Balance
||$4.05 (1 1/2% x $270)
||$3.75 (1 1/2% 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
|Average Daily Balance
||$1.50 (1 1/2% x $100)
||$6.00 (1 1/2% x
Questions about a particular issuer
should be sent to the agency with jurisdiction.
Comptroller of the Currency
Management, Mail Stop 7-5
Washington, DC 20219
State Member Banks of the Reserve System
Consumer and Community
Federal Reserve Board
20th & C Streets,
Washington, DC 20551
Federal Credit Unions
National Credit Union
1776 G Street, NW
Washington, DC 20456
Non-Member Federally Insured Banks
Office of Consumer
Federal Deposit Insurance Corporation
Washington, DC 20429
Federally Insured Savings and Loans, and Federally Chartered State
Consumer Affairs Program
Office of Thrift
1700 G Street, NW
Washington, DC 20552