| PFPlanning.com
Part 2:
Choosing and Using Credit
Cards
Chances are you've gotten your share
of "pre-approved" credit card offers in the mail, some with low introductory
rates and other perks. Many of these solicitations urge you to accept "before
the offer expires." Before you accept, shop around to get the best deal.
Credit Card Terms
A credit card is a form of borrowing that often involves charges. Credit
terms and conditions affect your overall cost. So it's wise to compare terms
and fees before you agree to open a credit or charge card
account. The following are some important terms to consider that generally
must be disclosed in credit card applications or in solicitations that require
no application. You also may want to ask about these terms when you're shopping
for a card.
Annual Percentage
Rate. The APR is a measure of the cost of credit,
expressed as a yearly rate. It also must be disclosed before you become
obligated on the account and on your account statements.
The card issuer also must disclose the
"periodic rate" - the rate applied to your outstanding balance to figure
the finance charge for each billing period.
Some credit card plans allow the issuer
to change your APR when interest rates or other economic indicators - called
indexes - change. Because the rate change is linked to the index's performance,
these plans are called "variable rate" programs. Rate changes raise or lower
the finance charge on your account. If you're considering a variable rate
card, the issuer must also provide various information that discloses to
you:
- that the rate may change; and
- how the rate is determined - which index is used
and what additional amount, the "margin," is added to determine your
new rate.
At the latest, you also must receive
information, before you become obligated on the account, about any limitations
on how much and how often your rate may change.
Free Period.
Also called a "grace period," a free period
lets you avoid finance charges by paying your balance in full before the
due date. Knowing whether a card gives you a free period is especially important
if you plan to pay your account in full each month. Without a free period,
the card issuer may impose a finance charge from the date you use your card
or from the date each transaction is posted to your account. If your card
includes a free period, the issuer must mail your bill at least 14 days
before the due date so you'll have enough time to pay.
Annual Fees.
Most issuers charge annual membership or participation fees. They often
range from $25 to $50, sometimes up to $100; "gold" or "platinum" cards
often charge up to $75 and sometimes up to several hundred dollars.
Transaction
Fees and Other Charges. A card may include
other costs. Some issuers charge a fee if you use the card to get a cash
advance, make a late payment, or exceed your credit limit. Some charge a
monthly fee whether or not you use the card.
Balance Computation
Method for the Finance Charge. If you don't
have a free period, or if you expect to pay for purchases over time, it's
important to know what method the issuer uses to calculate your finance
charge. This can make a big difference in how much of a finance charge you'll
pay - even if the APR and your buying patterns remain relatively constant.
See page 4 for examples of how the methods can affect your costs.
Examples of balance computation methods include the
following.
Average Daily
Balance. This is the most common calculation
method. It credits your account from the day payment is received by the
issuer. To figure the balance due, the issuer totals the beginning balance
for each day in the billing period and subtracts any credits made to your
account that day. While new purchases may or may not be added to the balance,
depending on your plan, cash advances typically are included. The resulting
daily balances are added for the billing cycle. The total is then divided
by the number of days in the billing period to get the "average daily balance."
Adjusted Balance.
This is usually the most advantageous method for card holders. Your balance
is determined by subtracting payments or credits received during the current
billing period from the balance at the end of the previous billing period.
Purchases made during the billing period aren't included.
This method gives you until the end of
the billing cycle to pay a portion of your balance to avoid the interest
charges on that amount. Some creditors exclude prior, unpaid finance charges
from the previous balance.
Previous Balance.
This is the amount you owed at the end of the previous billing period. Payments,
credits and new purchases during the current billing period are not included.
Some creditors also exclude unpaid finance charges.
Two-cycle Balances.
Issuers sometimes use various methods to calculate
your balance that make use of your last two month's account activity. Read
your agreement carefully to find out if your issuer uses this approach and,
if so, what specific two-cycle method is used.
If you don't understand how your balance
is calculated, ask your card issuer. An explanation must also appear on
your billing statements.
Other Costs and Features
Credit terms vary among issuers. When shopping for a card, think about how
you plan to use it. If you expect to pay your bills in full each month,
the annual fee and other charges may be more important than the periodic
rate and the APR, if there is a grace period for purchases. However, if
you use the cash advance feature, many cards do not permit a grace period
for the amounts due - even if they have a grace period for purchases. So,
it may still be wise to consider the APR and balance computation method.
Also, if you plan to pay for purchases over time, the APR and the balance
computation method are definitely major considerations.
You'll probably also want to consider
if the credit limit is high enough, how widely the card is accepted, and
the plan's services and features. For example, you may be interested in
"affinity cards" - all-purpose credit cards sponsored by professional organizations,
college alumni associations and some members of the travel industry. An
affinity card issuer often donates a portion of the annual fees or charges
to the sponsoring organization, or qualifies you for free travel or other
bonuses.
Special Delinquency
Rates. Some cards with low rates for on-time
payments apply a very high APR if you are late a certain number of times
in any specified time period. These rates sometimes exceed 20 percent. Information
about delinquency rates should be disclosed to you in credit card applications
or in solicitations that do not require an application.
Receiving a Credit Card
Federal law prohibits issuers from sending you a card you didn't ask for.
However, an issuer can send you a renewal or substitute card without your
request. Issuers also may send you an application or a solicitation, or
ask you by phone if you want a card - and, if you say yes, they may send
you one.
Cardholder Protections
Federal law protects your use of credit cards.
Prompt Credit
for Payment. An issuer must credit your account
the day payment is received. The exceptions are if the payment is not made
according to the creditor's requirements, or the delay in crediting your
account won't result in a charge.
To help avoid finance charges, follow
the issuer's mailing instructions. Payments sent to the wrong address could
delay crediting your account for up to five days. If you misplace your payment
envelope, look for the payment address on your billing statement or call
the issuer.
Refunds of
Credit Balances. When you make a return or
pay more than the total balance at present, you can keep the credit on your
account or write your issuer for a refund - if it's more than a dollar.
A refund must be issued within seven business days of receiving your request.
If a credit stays on your account for more than six months, the issuer must
make a good faith effort to send you a refund.
Errors on Your
Bill. Issuers must follow rules for promptly
correcting billing errors. You'll get a statement outlining these rules
when you open an account and at least once a year. In fact, many issuers
include a summary of these rights on your bills.
If you find a mistake on your bill, you
can dispute the charge and withhold payment on that amount while the charge
is being investigated. The error might be a charge for the wrong amount,
for something you didn't accept, or for an item that wasn't delivered as
agreed. Of course, you still have to pay any part of the bill that's not
in dispute, including finance and other charges.
If you decide to dispute a charge:
- Write to the creditor at the address indicated on
your statement for "billing inquiries." Include your name, address,
account number, and a description of the error.
- Send your letter soon. It must reach the creditor
within 60 days after the first bill containing the error was mailed
to you.
The creditor must acknowledge your complaint
in writing within 30 days of receipt, unless the problem has been resolved.
At the latest, the dispute must be resolved within two billing cycles, but
not more than 90 days.
Unauthorized
Charges. If your card is used without your
permission, you can be held responsible for up to $50 per card.
If you report the loss before
the card is used, you can't be held responsible for any unauthorized
charges. If a thief uses your card before you report it missing, the most
you'll owe for unauthorized charges is $50.
To minimize your liability, report the
loss as soon as possible. Some issuers have 24-hour toll-free telephone
numbers to accept emergency information. It's a good idea to follow-up with
a letter to the issuer - include your account number, the date you noticed
your card missing, and the date you reported the loss.
Disputes about
Merchandise or Services. You can dispute charges
for unsatisfactory goods or services. To do so, you must:
- have made the purchase in your home state or within
100 miles of your current billing address. The charge must be for more
than $50. (These limitations don't apply if the seller also is the card
issuer or if a special business relationship exists between the seller
and the card issuer.) and,
- first make a good faith effort to resolve the dispute
with the seller. No special procedures are required to do so.
If these conditions don't apply, you
may want to consider filing an action in small claims court.
Shopping Tips
Keep these tips in mind when looking for a credit or charge card.
- Shop around for the plan that best fits your needs.
- Make sure you understand a plan's terms before you
accept the card.
- Hold on to receipts to reconcile charges when your
bill arrives.
- Protect your cards and account numbers to prevent
unauthorized use. Draw a line through blank spaces on charge slips so
the amount can't be changed. Tear up carbons.
- Keep a record - in a safe place separate from your
cards - of your account numbers, expiration dates and the phone numbers
of each issuer to report a loss quickly.
- Carry only the cards you think you'll use.
For Help and Information
Questions about a particular issuer should be sent to the agency with jurisdiction.
National Banks
Comptroller of the Currency
Compliance Management, Mail Stop 7-5
Washington, DC 20219
State Member Banks of the
Reserve System
Consumer and Community Affairs
Federal Reserve Board
20th & C Streets, NW
Washington, DC 20551
Federal Credit Unions
National Credit Union Administration
1776 G Street, NW
Washington, DC 20456
Non-Member Federally Insured
Banks
Office of Consumer Programs
Federal Deposit Insurance Corporation
550 Seventeenth Street, NW
Washington, DC 20429
Federally Insured Savings
and Loans, and Federally Chartered State Banks
Consumer Affairs Program
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Other Credit Card Issuers
(includes retail/gasoline companies)
Consumer Response Center
Federal Trade Commission
Washington, DC 20580
Here’s how some 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 ½%
|
1 ½%
|
|
APR
|
18%
|
18%
|
|
Previous Balance
|
$400
|
$400
|
|
New Purchases
|
$50 on 18th day
|
$50 on 18th day
|
|
Payments
|
$300 on 15th day
(new balance = $100)
|
$300 on 15th day
(new balance = $100)
|
|
Average Daily Balance
|
$270*
|
$250*
|
|
Finance Charge
|
$4.05
(1 ½% x $270)
|
$3.75
(1 ½% 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
|
1½%
|
1 ½%
|
|
APR
|
18%
|
18%
|
|
Previous Balance
|
$400
|
$400
|
|
Payments
|
$300
|
$300
|
|
Average Daily Balance
|
N/A
|
N/A
|
|
Finance Charge
|
$1.50
(1 ½% x $100)
|
$6.00
(1 ½% x $400)
|
|
