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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.
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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.
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.
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