How will you use your credit card?
The first step in choosing a credit card is thinking about how
you will use it.
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If you expect to always pay your monthly bill in full--and other
features such as frequent flyer miles don't interest you--your best
choice may be a card that has no annual fee and offers a longer
grace period.
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If you sometimes carry over a balance from month to month, you
may be more interested in a card that carries a lower interest rate
(stated as an annual percentage rate, or APR).
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If you expect to use your card to get cash advances, you'll want
to look for a card that carries a lower APR and lower fees on cash
advances. Some cards charge a higher APR for cash advances than for
purchases.
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What are the APRs?
The annual percentage rate--APR--is the way of stating the
interest rate you will pay if you carry over a balance, take out a
cash advance, or transfer a balance from another card. The APR
states the interest rate as a yearly rate.
Multiple APRs
A single credit card may have several APRs:
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One APR for purchases, another for cash advances, and yet
another for balance transfers. The APRs for cash advances and
balance transfers often are higher than the APR for purchases (for
example, 14% for purchases, 18% for cash advances, and 19% for
balance transfers).
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Tiered APRs. Different rates are applied to different
levels of the outstanding balance (for example, 16% on balances of
$1-$500 and 17% on balances above $500).
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A penalty APR. The APR may increase if you are late in
making payments. For example, your card agreement may say, "If your
payment arrives more than ten days late two times within a
six-month period, the penalty rate will apply."
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An introductory APR. A different rate will apply after
the introductory rate expires.
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A delayed APR. A different rate will apply in the
future. For example, a card may advertise that there is "no
interest until next March." Look for the APR that will be in effect
after March.
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If you carry over a part of your balance from month to month,
even a small difference in the APR can make a big difference in how
much you will pay over a year.
Fixed vs. variable APR
Some credit cards are "fixed rate"--the APR doesn't change, or at
least doesn't change often. Even the APR on a "fixed rate" credit
card can change over time. However, the credit card company must
tell you before increasing the fixed APR.
Other credit cards are "variable rate"--the APR changes from
time to time. The rate is usually tied to another interest rate,
such as the prime rate or the Treasury bill rate. If the other rate
changes, the rate on your card may change, too. Look for
information on the credit card application and in the credit card
agreement to see how often your card's APR may change (the
agreement is like a contract--it lists the terms and conditions for
using your credit card).
How long is the grace period?
The grace period is the number of days you have to pay your bill
in full without triggering a finance charge. For example, the
credit card company may say that you have "25 days from the
statement date, provided you paid your previous balance in full by
the due date." The statement date is given on the bill.
The grace period usually applies only to new purchases. Most
credit cards do not give a grace period for cash advances and
balance transfers. Instead, interest charges start right away.
If you carried over any part of your balance from the preceding
month, you may not have a grace period for new purchases. Instead,
you may be charged interest as soon as you make a purchase (in
addition to being charged interest on the earlier balance you have
not paid off). Look on the credit card application for information
about the "method of computing the balance for purchases" to see if
new purchases are included or excluded. Information on methods of
computing the balance is in the section "How is the finance charge
calculated?"
How is the finance charge calculated?
The finance charge is the dollar amount you pay to use credit.
The amount depends in part on your outstanding balance and the
APR.
Credit card companies use one of several methods to calculate
the outstanding balance. The method can make a big difference in
the finance charge you'll pay. Your outstanding balance may be
calculated
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Over one billing cycle or two,
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Using the adjusted balance, the average daily balance, or the
previous balance, and
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Including or excluding new purchases in the balance.
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Depending on the balance you carry and the timing of your
purchases and payments, you'll usually have a lower finance charge
with one-cycle billing and either
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The average daily balance method excluding new purchases,
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The adjusted balance method, or
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The previous balance method. |
Minimum finance charge
Some credit cards have a minimum finance charge. You'll be charged
that minimum even if the calculated amount of your finance charge
is less. For example, your finance charge may be calculated to be
35%--but if the company's minimum finance charge is $1.00, you'll
pay $1.00. A minimum finance charge usually applies only when you
must pay a finance charge--that is, when you carry over a balance
from one billing cycle to the next.
What are the fees?
Most credit cards charge fees under certain circumstances:
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Annual fee (sometimes billed monthly). Charged for
having the card
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Cash advance fee. Charged when you use the card for a
cash advance; may be a flat fee (for example, $3.00) or a
percentage of the cash advance (for example, 3%)
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Balance-transfer fee. Charged when you transfer a
balance from another credit card (Your credit card company may send
you "checks" to pay off the other card. The balance is transferred
when you use one of these checks to pay the amount due on the other
card.)
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Late-payment fee. Charged if your payment is received
after the due date
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Over-the-credit-limit fee. Charged if you go over your
credit limit
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Credit-limit-increase fee. Charged if you ask for an
increase in your credit limit
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Set-up fee. Charged when a new credit card account is
opened
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Return-item fee. Charged if you pay your bill by check
and the check is returned for non-sufficient funds (that is, your
check bounces)
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Other fees. Some credit card companies charge a fee if
you pay by telephone (that is, if you arrange by phone for payment
to be transferred from your bank to the company) or to cover the
costs of reporting to credit bureaus, reviewing your account, or
providing other customer services. Read the information in your
credit card agreement to see if there are other fees and
charges.
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What are the cash advance features?
Some credit cards let you borrow cash in addition to making
purchases on credit. Most credit card companies treat these cash
advances and your purchases differently. If you plan to use your
card for cash advances, look for information about
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Access. Most credit cards let you use an ATM to get a
cash advance. Or the credit card company may send you "checks" that
you can write to get the cash advance.
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APR. The APR for cash advances may be higher than the
APR for purchases.
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Fees. The credit card company may charge a fee in
addition to the interest you will pay on the amount advanced.
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Limits. Some credit cards limit cash advances to a
dollar amount (for example, $200 per cash advance or $500 per week)
or a portion of your credit limit (for example, 75% of your
available credit limit).
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How payments are credited. Many credit card companies
apply your payments to purchases first and then to cash advances.
Read your credit card agreement to learn how your payments will be
credited.
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How much is the credit limit?
The credit limit is the maximum total amount--for purchases,
cash advances, balance transfers, fees, and finance charges--you
may charge on your credit card. If you go over this limit, you may
have to pay an "over-the-credit-limit fee."
What kind of card is it?
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Most credit card companies offer several kinds of cards:
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Secured cards, which require a security deposit. The
larger the security deposit, the higher the credit limit. Secured
cards are usually offered to people who have limited credit
records--people who are just starting out or who have had trouble
with credit in the past.
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Regular cards, which do not require a security deposit
and have just a few features. Most regular cards have higher credit
limits than secured cards but lower credit limits than premium
cards.
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Premium cards (gold, platinum, titanium), which offer
higher credit limits and usually have extra features--for example,
product warranties, travel insurance, or emergency services.
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Does the card offer incentives and other features?
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Many credit card companies offer incentives to use the card and
other special features:
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Rebates (money back) on the purchases you make
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Frequent flier miles or phone-call minutes
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Additional warranty coverage for the items you
purchase
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Car rental insurance
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Travel accident insurance or travel-related
discounts
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Credit card registration, to help if your wallet or
purse is lost or stolen and you need to report that all your credit
cards are missing
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Credit cards may also offer, for a price,
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Insurance to cover the payments on your credit card
balance if you become unemployed or disabled, or die. Premiums
are usually due monthly, making it easy to cancel if the payments
are higher than you want to pay or you decide you don't need the
insurance any longer.
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Insurance to cover the first $50 of charges if your
card is lost or stolen. Under federal law, you are not responsible
for charges over $50.
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Before you sign up to pay for any of these features, think
carefully about whether it will be useful for you. Don't pay for
something you don't want or don't need.
How do I find information about credit cards?
You can find lists of credit card plans, rates, and terms on the
Internet, in personal finance magazines, and in newspapers. The
Federal Reserve System surveys
credit card companies every six months. You'll need to get the most
recent information directly from the credit card company--by
phoning the company, looking on the company's web site, or reading
a solicitation or application.
Under federal law, all solicitations and applications for credit
cards must include certain key information, in a disclosure box
similar to the one shown.
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Annual percentage rate
(APR) for purchases
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2.9% until 11/1/06
after that, 14.9%
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Other APRs
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Cash-advance APR: 15.9%
Balance-Transfer APR: 15.9%
Penalty rate: 23.9% See explanation below.*
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Variable-rate informtion
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Your APR for purchase transactions may vary.
The rate is determined monthly by adding
5.9% to the Prime Rate.**
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Grace period for repayment
of balances for purchases
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25 days on average
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Method of computing the
balance for purchases
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Average daily balance (excluding new
purchases)
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Annual fees
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None
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Minimum finance charge
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$.50
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Transaction fee for cash advances: 3% of the amount
advanced
Balance-transfer fee: 3% of the amount transferred
Late-payment
fee: $25
Over-the-credit-limit
fee: $25
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* Explanation of penalty. If your payment arrives more than ten
days late two times withing a six-month period, the penalty rate
will apply.
** The Prime Rate used to determine your APR is the rate published
in the Wall Street Journal on the 10th day of the prior
month.
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APR for purchases. The annual percentage rate you'll be
charged if you carry over a balance from month to month. If the
card has an introductory rate, you'll see both that rate and the
rate that will apply after the introductory rate expires.
Other APRs. The APRs
you'll be charged if you get a cash advance on your card, transfer
a balance from another card, or are late in making a payment. More
information about the penalty rate may be stated outside the
disclosure box--for instance, in a footnote. In this example, if
you make two payments that are more than ten days late within six
months, the APR will increase to 23.9%.
Variable-rate
information. Information about how the variable rate will be
determined (if relevant). More information may be stated outside
the disclosure box--for instance, in a footnote.
Grace period for repayment of balances for purchases.
The number of days you'll have to pay your bill for purchases in
full without triggering a finance charge.
Method of computing the
balance for purchases. The method that will be used to
calculate your outstanding balance if you carry over a balance and
will pay a finance charge.
Annual fees. The amount you'll be charged each
twelve-month period for simply having the card.
Minimum finance
charge. The minimum, or fixed, finance charge that will be
imposed during a billing cycle. A minimum finance charge usually
applies only when a finance charge is imposed, that is, when you
carry over a balance.
Transaction fee
for cash advances. The charge that will be imposed each time
you use the card for a cash advance.
Balance-transfer
fee. The fee that will be imposed each time you transfer a
balance from another card.
Late-payment fee. The fee
that will be imposed when your payment is late.
Over-the-credit-limit
fee. The fee that will be imposed if your charges exceed the
credit limit set for your card.
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What are your liability limits?
If your credit card is lost or stolen--and then is used by
someone without your permission--you do not have to pay more than
$50 of those charges. This protection is provided by the federal
Truth in Lending Act. You do not need to buy "credit card
insurance" to cover amounts over $50.
If you discover that your card is lost or stolen, report it
immediately to your credit card company. Call the toll-free number
listed on your monthly statement. The company will cancel the card
so that new purchases cannot be made with it. The company will also
send you a new card.
Make a list of your account numbers and the companies' phone
numbers. Keep the list in a safe place. If your wallet or purse is
lost or stolen, you'll have all the numbers in one place. Take the
list of phone numbers--not the account numbers--with you when you
travel, just in case a card is lost or stolen.
What can you do about billing errors?
The federal Fair Credit Billing Act covers billing errors.
Examples of billing error are
If you think your credit card bill has an error, take the
following steps:
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Write to the credit card company within 60 days after the
statement date on the bill with the error. Use the address for
"billing inquiries" listed on the bill. Tell the company
Your name and account number,
That you believe the bill contains an error, and why you
believe it's wrong, and
The date and amount of the error (the "disputed
amount").
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Pay all the other parts of the bill. You do not have to pay the
"disputed amount" or any minimum payments or finance charges that
apply to it.
If there is an error, you will not have to pay any finance
charges on the disputed amount. Your account must be corrected.
If there is no error, the credit card company must send you an
explanation and a statement of the amount you owe. The amount will
include any finance charges or other charges that accumulated while
you were questioning the bill.
What if the item you purchase is damaged?
The federal Fair Credit Billing Act allows you to withhold
payment on any damaged or poor-quality goods or services purchased
with a credit card--even if you have 
accepted the goods or services--as long as you
have made an attempt to solve the problem with the merchant.
The sale must have been for more than $50 and must have taken
place in your home state or within 100 miles of your home address.
You should notify the credit card company in writing and explain
why you are withholding your payment.
You may withhold the payment while the credit card company
investigates your claim. If you pay the charges for the goods on
your credit card bill before the dispute is resolved, you will lose
your right to make a claim.