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Choosing and Using Credit Cards
How To Pay Down Your DebtPaying down debt is an art. When you are stuck with high interest rates and you are making minimum payments, you can pay ..... Federal Trade Commission - February 1993
Shop around for credit card terms that are best for you.
Make sure you understand the terms of a credit card plan before you accept the card.
Pay bills promptly to keep finance charges as low as possible.
Keep copies of sales slips and promptly compare charges when your bills arrive.
Draw a line through blank spaces about the total when you sign receipts.
Keep a list of your credit card account numbers and the telephone numbers of each card issuer in a safe place in case your cards are lost or stolen.
Bureau of Consumer Protection Office of Consumer & Business Education
(202) 326-3650
Chances are you have received offers in the mail asking if you would like to open credit card accounts. Frequently, these offers say that you have been 'pre-approved' for the card, with a line of credit already set aside for your use. Typically, these offers urge you to accept quickly, 'before the offer expires.' However, before accepting a credit card offer, understand the card's credit terms and compare costs of similar cards to get the features and terms you want.
Choosing a Credit Card
Credit card offers may seem attractive, but remember a credit card is a form of borrowing that usually involves a 'finance charge' -- a charge for the convenience of borrowing -- and often other charges as well.
Credit Card Terms
Before selecting a credit card, learn which credit terms and conditions apply. Each affects the overall cost of the credit you will be using. Under the Fair Credit and Charge Card Disclosure Act, you can compare terms and fees before you agree to open a credit card or charge card (no interest) account. Be sure to consider and compare the following terms that direct-mail applications and pre-approved solicitations must reveal.
Annual Percentage Rate
The 'annual percentage rate,' or APR, is disclosed to you when you apply for a card, again when you open the account, and it is also noted on each bill you receive. It is a measure of the cost of credit, expressed as a yearly rate. The card issuer also must disclose the 'periodic rate' -- that is, the rate the card issuer applies to your outstanding account balance to figure the finance charge for each billing period.
Some credit card plans allow the card issuer to change the annual percentage rate on your account when interest rates or other economic indicators (called indexes) change. Because the rate change is linked to the performance of the index, which may rise or fall, these plans are commonly called 'variable rate' plans. Rate changes raise or lower the amount of the finance charge you pay on your account. If the credit card you are considering has a variable rate feature, the card issuer must tell you that the rate may vary and how the rate is determined, including which index is used and what additional amount (the 'margin') is added to the index to determine your new rate. You also must be told how much and how often your rate may change.
Free Period
A free period -- also called a 'grace period' -- allows you to avoid the finance charge by paying your current balance in full before the 'due date' shown on your statement. Knowing whether a credit card plan gives you a free period is especially important if you plan to pay your account in full each month. If there is no free period, the card issuer will impose a finance charge from the date you use your credit card or from the date each credit card transaction is posted to your account. If your credit card plan allows a free period, the card issuer must mail your bill at least 14 days before your payment is due. This is to ensure that you have enough time to make your payment by the due date.
Annual Fees
Most credit card issuers charge annual membership or other participation fees. These fees range from $25 to $50 for most cards, and from $75 on up for premium 'gold' or 'platinum' cards.
Transaction Fees and Other Charges
A credit card also may involve other types of costs. For example, some card issuers charge a fee when you use the card to obtain a cash advance, when you fail to make a payment on time, or when you go over your credit limit. Some charge a flat monthly fee whether or not you use the card.
Free Government GrantsAnyone thinking about going into business for themselves, or wanting to expand an existing ..... Balance Computation Method for the Finance Charge
If your plan has no free period, or if you expect to pay for purchases over time, it is important to know how the card issuer will calculate your finance charge. This charge will vary depending upon the method the card issuer uses to figure your balance. The method used can make a difference, sometimes a big difference, in how much finance charge you will pay -- even when the APR is identical to that charged by another card issuer and the pattern of purchases and payments is the same. Examples of how finance charges based on identical APRs can differ are shown on a following page.
Average Daily Balance (including or excluding new purchases)
The average daily balance method gives you credit for your payment from the day the card issuer receives it. To compute the balance due, the card issuer totals the beginning balance for each day in the billing period and deducts any payments credited to your account that day. New purchases may or may not be added to the balance, depending on the plan, but cash advances typically are added. The resulting daily balances are added up for the billing cycle and the total is then divided by the number of days in the billing period to arrive at the 'average daily balance.' This is the most common method used by credit card issuers.
Adjusted Balance
This balance is computed by subtracting the payments you made and any credits you received during the present billing period from the balance you owed at the end of the previous billing period. New purchases that you made during the billing period are not included. Under the adjusted balance method, you have until the end of the billing cycle to pay part of your balance and you avoid the interest charges on that portion. Some creditors exclude prior, unpaid finance charges from the previous balance. The adjusted balance method usually is the most advantageous to card users.
Previous Balance
As the name suggests, this balance is simply the amount that you owed at the end of the previous billing period. Payments, credits, or new purchases made during the current billing period are not taken into account. Some creditors also exclude unpaid finance charges in computing this balance. If you do not understand how the balance on your account is computed, ask the card issuer. (An explanation of how the balance was determined must appear on the billing statements the card issuer provides you and on applications and pre-approved solicitations the card issuer may send you.)
The following are examples of how different methods of calculating finance charges affect the cost of credit:
Average Daily Average Daily
Balance Balance
(including new (excluding new purchases) purchases)
Monthly rate 1 1/2% 1 1/2%
APR 18% 18%
Previous
Balance $400 $400
New Purchases $50 $50
on 18th day on 18th day
Payments $300 $300
on 15th day on 15th day
(new balance = $100) (new balance = $100)
Average
Daily Balance $270* $250**
Finance Charge $4.05 $3.75
(1 1/2% x $270) (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) divided by
30 days = $270
** To figure average daily balance (excluding new purchases):
($400 x 15 days) + ($100 x 15 days) divided by
30 days = $250
Adjusted Balance Previous Balance
Monthly rate 1 1/2% 1 1/2%
APR 18% 18%
Previous
Balance $400 $400
Payments $300 $300
Average
Daily Balance N/A N/A
Finance Charge $1.50 $6.00
(1 1/2% x $100) (1 1/2% x $400)
Costs and Features
Credit terms differ among card issuers, so shop around for the card that is best for you. Which one is best may depend on how you plan to use it. If you plan to pay bills in full each month, the size of the annual fee or other fees, and not the periodic and annual percentage rate, may be more important. If you expect to use credit cards to pay for purchases over time, the APR and the balance computation method are important terms to consider. In either case, keep in mind that your costs will be affected by whether or not there is a grace period.
When shopping for a credit card, you probably will want to look at other factors besides costs -- such as whether the credit limit is high enough to meet your needs, how widely the card is accepted, and what services and features are available under the plan. You may be interested, for example, in 'affinity cards' -- all-purpose credit cards that are sponsored by professional organizations, college alumni associations, and some members of the travel industry. Frequently, an affinity card issuer donates a portion of the annual fees or transaction charges to the sponsoring organization, or allows you to qualify for free travel or other bonuses.
Using a Credit Card
Federal law prohibits card issuers from sending you a credit card that you did not request. (The issuer may send you a renewal or substitute card without a request.) Card issuers are permitted to mail you an application or a solicitation for a credit card or to ask you by phone whether you want to receive a card -- and to send you one if you say yes.
Credit Card Protections
Federal law protects consumers when they use credit cards. The protections include the following items.
Prompt Credit for Payment
A card issuer must credit ......
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