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CONTENTS Definition of Terms |
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SHOP.
Smart consumers do comparison shopping when looking for credit such as a
mortgage or an auto loan. It is also a good practice to engage in when
shopping for a credit card plan, because the choices you make could save
you money.
SHOP among the various plans of credit card issuers contained in this brochure. Compare them with cards you already have and with offers you receive in the mail for the terms that best suit your spending and repayment habits. The costs and terms of the plan or plans can make a difference to how much you pay for the privilege of borrowing. In the disclosure form from the credit card issuer, key credit terms to consider are the annual percentage rate (APR), annual fee, and grace period. Also consider credit terms such as cash advance fees, late payment charges, and over-the-limit fees. Take these items into consideration along with how you pay your bills each month, whether in full or only partially. You could save yourself some money.
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Variables and Impact Calculation of Finance Charge |
It is helpful to know how the credit card
issuer will calculate the finance charge on your credit card bill. To
determine the finance charge, an issuer will apply a periodic rate to a
balance. Card issuers use different balance calculation methods such as:
the average daily balance method, the previous balance method, and the
adjusted balance method.
With the average daily balance method (the most common method), the issuer calculates the balance by taking the amount of debt you had in your account each day during the period covered by the billing statement and averages it. With the previous balance method, the issuer uses the balance outstanding at the end of the previous period—that is, the period prior to the one covered by the billing statement. With the adjusted balance method, the balance is derived by subtracting the payments you’ve made from the previous balance. |
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Combinations to Consider |
Smart consumers find the best deal for their budgets and repayment style. For example, if you always pay your monthly bill(s) in full, the best type of card is one that has no annual fee and offers a grace period for paying your bill without paying a finance charge. If you don’t always pay off the credit card balance monthly, be sure to look at the periodic rate that will be used to calculate the finance charge. Credit card issuers that offer variable interest rate plans derive the rate to be charged to the consumer by using a formula. Two of the most common formulas are: Some of the more common indexes used by credit card issuers are the prime rate, the one-, three-, or six-month Treasury Bill rate, the federal funds or Federal Reserve discount rate. Most of these indexes can be found in the money or business section of major newspapers. Once the interest rate corresponding to the index has been identified, the issuer then adds a number of percentage points, the “margin”, to this index rate to calculate the rate charged. In some cases, the issuer might elect to use another formula to determine the rate to be charged to the consumer. The issuers multiply the index or index plus the margin by another number, “the multiple”, to calculate the rate charged.
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Possible Savings |
The following is an example of the annual
savings you could achieve by switching to a credit card plan with a lower
interest rate and no annual fee.
Assumption
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Plan
Descriptions:
In this example, the total possible savings each year achieved by selecting a credit card plan with a lower interest rate and no annual fee is ($470 – $350) $120.
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Credit
Card Owner's Checklist |
If you are applying for your first credit card
or have several cards already, here are some helpful tips you might want
to follow in shopping for a credit card.
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Survey Results |
Every six months the Federal Reserve System collects and publishes a report on the terms of credit card plans offered by financial institutions. This report includes information supplied by the largest card issuers in the country, as well as any other financial institutions that indicate to the Federal Reserve System that they would like to participate in the report and submit information about their credit card plans. The credit terms listed in this report are as of the date indicated below and are subject to change. Consequently, readers are encouraged to contact the credit card issuer for current rates and to learn about their other credit card plans. | |||||||||||||||||||||||||||||||||
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Codes
Used in the Credit Card Plan List |
Availability Refers to availability of card to consumers: N = national R = only in selected states State abbreviation = only in state specified Type of Pricing Index 1 = prime rate Grace Period Other Features
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Last update: November 3, 1999, 9:30 AM
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