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| facts | for Consumers |
Federal Trade Commission - February 1993
Choosing and
Using Credit Cards
fast facts
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| 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.
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.
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.
* 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 page 4.
Some of the
ways card issuers figure balances for finance charges are described on
pages 4 and 5.
* 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 Balance (including new purchases) | Average Daily Balance (excluding new purchases) | |
| Monthly rate | 1 1/2% | 1 1/2% |
| APR | 18% | 18% |
| Previous | ||
| Balance | $400 | $400 |
| New | $50 | $50 |
| Purchases | on 18th day | on 18th day |
| Payments | $300 on 15th day (new balance = $100 |
$300 on 15th day (new balance = $100 |
| Average | ||
| Daily Balance | $270* | $250* |
| Finance | $4.05 | $3.75 |
| Charge | (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) |
||
| 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 | 1 1/2% | 1 1/2% |
| APR | 18% | 18% |
| Previous | ||
| Balance | $400 | $400 |
| Payments | $300 | $300 |
| Average | ||
| Daily Balance | N/A | N/A |
| Finance | $1.50 | $6.00 |
| Charge | (1 1/2% x $100) | (1 1/2% x $400) |
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.
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.
Federal law protects consumers when they use
credit cards. The protections include the following items.
*
Prompt Credit for Payment. A card issuer must credit
your account on the day the issuer receives your payment, unless the
payment is not made according to the creditor's requirements or the delay
in crediting to your account does not result in a charge. To avoid delays
that could result in finance charges, follow the card issuer's
instructions about where to send payments. Payments sent to other
locations could delay getting credit for your payment for up to five days.
If you lose your payment envelope, look on the billing statement for the
address for payments or call the card issuer.
* Refunds of
Credit Balances. When you return merchandise or pay more than you
owe, you have the option of keeping the credit balance on your account or
requesting a refund (if the amount exceeds $1.00). To obtain a refund,
write the card issuer. The card issuer must send you the refund within
seven business days of receiving your request. (Also, if a credit balance
remains on your account for more than six months, the card issuer must
make a good faith effort to refund the credit balance.)
*
Errors on Your Bill. Federal law provides specific rules
that the card issuer must follow for promptly correcting billing errors.
The card issuer will give you a statement describing these rules when you
open the credit card account and, after that, at least once a year. In
fact, many card issuers print a summary of your rights on each bill they
send you.
You must notify the card issuer in writing at the
address specified for billing errors when you find an error, and you must
do so within 60 days after the first bill containing the error was mailed
to you. (For this reason, keep your credit card receipts and promptly
compare them when your bills arrive.) In your notification letter, include
your name, your account number, the amount of the suspected error, and the
reason why you believe that the bill contains an error. The card issuer,
in turn, must look into the problem and either correct the error or
explain to you why the bill is correct. This must occur within two billing
cycles and not later than 90 days after the issuer receives your billing
error notice. During the period that the card issuer is investigating the
error, you do not have to pay the amount in question. (For further
information, write: "Credit Billing Errors," Public Reference,
Federal Trade Commission, Washington, D.C. 20580.)
*
Unauthorized charges. Under federal law, if your credit card is used
without your authorization, you can be held liable for up to $50 per card.
If you report the loss before the card is used, federal law says the card
issuer cannot hold you responsible for any unauthorized charges. If a
thief uses your card before you report it missing, the most you will owe
for unauthorized charges is $50. This is true even if a thief is able to
use your credit card at an automated teller machine (ATM) to access your
credit card account. To minimize your liability, report the loss of your
card as soon as possible. Some companies have toll-free numbers printed on
their statements and 24-hour service to accept such emergency information.
For your own protection, you should follow up your phone call with a
letter to the card issuer. The letter should give your card number, say
when your card was missing, and mention the date you called in the loss.
* Disputes about Merchandise or Services. If
you have a problem with merchandise or services that you charged to a
credit card, and you have made a good faith effort to work out the problem
with the seller, you have the right to withhold from the card issuer
payment for the merchandise or services. You can withhold payment up to
the amount of credit outstanding for the purchase, plus any finance or
related charges. If the card you used is a bank card, a travel and
entertainment card, or another card not issued by the seller of the
defective merchandise, you can withhold payment only if the purchase
exceeded $50 and occurred in your home state or within 100 miles of your
billing address. If these conditions do not apply to you, you may want to
consider filing an action in small claims court -- an informal legal
proceeding that can be used to settle disputes. While the maximum amounts
that can be claimed or awarded differ from state to state, most small
claims courts hear cases involving amounts ranging from $25 to $2,000.
Some states have recently raised their limits to $5,000. Check your local
telephone book under your municipal, county, or state government headings
for small claims court listings.
* 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. Review the disclosures of terms and fees
that must appear on credit-card offers you receive in the mail.
* Pay bills promptly to keep finance charges as low as possible.
* Keep copies of sales slips and promptly compare charges when
your bills arrive.
* Protect your credit cards and account
numbers to prevent unauthorized use. Draw a line through blank spaces
above the total when you sign receipts. Rip up or retain carbons.
* Keep a list of your credit card numbers and the telephone numbers
of each card issuer in a safe place in case your cards are lost or stolen.
The following federal agencies are responsible
for enforcing federal laws that govern credit card transactions. Questions
concerning a particular card issuer should be directed to the enforcement
agency responsible for that issuer.
State Member
Banks of the Reserve System
Consumer and Community Affairs
Board of Governors of the Federal Reserve System
20th & C Sts.,
N.W.
Washington, D.C. 20551
National Banks
Comptroller of the Currency
Compliance Management
Mail Stop 7-5
Washington, D.C. 20219
Federal Credit Unions
National Credit Union Administration
1776 G St., N.W.
Washington, D.C. 20456
Non-Member Federally
Insured Banks
Office of Consumer Programs
Federal
Deposit Insurance Corporation
550 Seventeenth St., N.W.
Washington, D.C. 20429
Federally Insured Savings
and Loans, and Federally Chartered State Banks
Consumer
Affairs Program
Office of Thrift Supervision
1700 G St., N.W.
Washington, D.C. 20552
Other Credit Card Issuers
(includes retail/gasoline companies)
Division of Credit Practices
Bureau of Consumer Protection
Federal Trade Commission
Washington, D.C. 20580
12/88; 11/91
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