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 Smart consumers comparison shop
for credit, whether they're looking for a mortgage,
an auto loan, or a credit card. Comparison shopping
is important because it could save you money.
The best credit cards you select and use can save you money but having
credit-cards may also result in you running-up excessive
debts and make you want to
get out of debt eventually!
Credit Cards
When you're looking for a credit card, be sure
to consider the costs and terms. They can make
a difference in how much you pay for the privilege
of borrowing. Compare them with the costs and
terms of the cards you already have to find the
plan that best fits your spending and repayment
habits.
Key costs and terms to consider are the annual
percentage rate (APR) for goods and services
as well as for cash advances, the annual
fee, and the grace period.
Also compare cash-advance fees,
late-payment charges, and
over-the-limit fees.
Besides looking at these costs and terms, think
about your typical bill-paying behavior. Do you
pay your outstanding balance in full each month?
Or do you usually carry over a balance? Matching
the credit card plan to your needs could save
money.
Credit
Card Interest Rates
Credit card issuers offer variable-rate, fixed-rate,
and tiered-rate plans. For variable-rate credit
card plans, the interest rate
is calculated according to a formula. Three of
the most commonly used formulas are
The most common indexes used by credit card issuers
are the prime rate; the one-, three- and six-month
Treasury bill rates; the federal funds rate; and
the Federal Reserve discount rate. Most of the indexes
are published in the money or business section of
major newspapers. If the index rate used for your
credit card changes, the rate on your card will,
too.
The margin is a number of percentage points
chosen by the credit card issuer. The card issuer
also chooses the multiple.
The interest rate on a fixed-rate credit card
plan, though not explicitly tied to changes in
another interest rate, also can change over time.
The card issuer must notify you before the "fixed"
interest rate is changed.
A tiered interest rate means that different
rates apply to different levels of the outstanding
balance (for example, 16% on balances of $1 -
$500; 17% on balances above $500).
Some credit-card issuers may have a policy that raises
your interest rate if you make late payments.
For example, if you make 2 late payments within
6 months, the card issuer may raise your interest
rate from 18% APR to 24% APR. If such a penalty
rate applies to your card, the issuer must
include a notice in the solicitation materials.
Credit card firms may also charge different interest rates
for different types of credit transactions. For example,
the card may carry one rate for purchases of goods
and services, another rate for cash advances,
and still another rate for balance transfers.
How
Much Will You Pay?
The finance charge--that
is, the dollar amount you will pay to use credit--depends
on your outstanding balance and the periodic
rate in your credit card plan:
What Is the Outstanding Balance?
The outstanding balance can be calculated in several
ways, and the method of calculation can make a
big difference in the finance charge you will
pay:
- Average daily balance method including
new purchases. The balance is the sum of
the outstanding balances for every day in the
billing cycle (including new purchases and deducting
payments and credits) divided by the number
of days in the billing cycle.
- Average daily balance method excluding
new purchases. The balance is the sum of
the outstanding balances for every day in the
billing cycle (excluding new purchases and deducting
payments and credits) divided by the number
of days in the billing cycle.
- Two-cycle average daily balance method
including new purchases. The balance is
the sum of the average daily balances for two
consecutive billing cycles. One daily balance,
that for the current billing cycle, is calculated
by summing the outstanding balances for every
day in the billing cycle (including new purchases
and deducting payments and credits) and dividing
that total by the number of days in the billing
cycle. The other daily balance is that from
the preceding billing cycle.
- Two-cycle average daily balance method
excluding new purchases. The balance is
the sum of the average daily balances for two
consecutive billing cycles. One daily balance,
that for the current billing cycle, is calculated
by summing the outstanding balances for every
day in the billing cycle (excluding new purchases
and deducting payments and credits) and dividing
that total by the number of days in the billing
cycle. The other daily balance is that from
the preceding billing cycle.
- Adjusted balance method. The balance
is the outstanding balance at the beginning
of the billing cycle minus payments and credits
made during the billing cycle.
- Previous balance method. The balance
is the outstanding balance at the beginning
of the billing cycle.
Depending on the balance you carry and the timing
of your purchases and payments, the average daily
balance method excluding new purchases, the adjusted
balance method, and the previous balance method
tend to result in lower finance charges than the
other balance-calculation methods.
What Is the Periodic Rate?
The periodic rate is the rate you are charged
each billing period. Usually the periodic rate
is the monthly interest rate, calculated by dividing
the card's APR by 12. If your card has different
rates for different types of transactions, then
different periodic rates will apply to those balances.
For example, if your card has a 12% APR on purchases,
the periodic rate for purchases is 1%; and if
your card has a 24% APR on cash advances, the
periodic rate for cash advances is 2%.
The Right Card for You
While the outstanding balance and the periodic
rate are important factors in choosing a credit
card, they shouldn't be your only considerations.
Other plan features may be more important to you,
depending on how you use the card. For example,
if you don't always pay your monthly bill in full,
you'll probably be more interested in a card that
carries a lower APR. On the other hand, if you
always pay your monthly bill in full and card
enhancements 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.
The grace period is the number of days between
the statement date and the due date during which
you can pay your bill without incurring a finance
charge. The card issuer may refer to the beginning
or ending point of the grace period and tell you
about any conditions that apply. For example,
the issuer may say you have "25 days from
the statement date, provided you have paid your
previous balance in full by the due date."
Keep in mind that the statement date is not
the date on which you receive the bill; it is
the date on which the issuer prepares the statement,
which may be a week or two before you actually
receive the bill in the mail.
How
Much Could You Save?
The following example illustrates the annual
savings you could achieve by switching to a credit
card plan with a lower APR and no annual fee.
The average monthly balance used in this simplified
example is around the national average for consumers
with credit card debt.
|
Terms |
Plan
A |
Plan
B |
| Average
monthly balance |
$2,500 |
$2,500 |
| APR |
x
18% |
x
14% |
| Amount
paid in finance charges annually |
$450 |
$350 |
| +
$20 |
+
$0 |
| Total
cost |
$470 |
$350 |
By switching to a credit card plan with a lower
APR and no annual fee, you could save $120 annually.
Of course, this example assumes that the interest
rate is applied to a constant balance of $2,500
and that you make all payments on time; if you paid
down some of the balance each month, the amount
paid in finance charges annually would be less.
Also, if you make a payment late, you may incur
additional fees that will increase your cost.
Credit Card
Shopper's Checklist
Here are some tips for shopping for a credit
card or evaluating the cards you already have.
- Make a list of features that best fit your
needs, and rank them according to how you plan
to use the card.
- Call the issuers of the cards that seem to
match your needs to verify the publicized information.
Ask if they have any other plans available.
- If you are currently a cardholder and have
a good credit rating, ask the issuer of your
card to lower your current rate or to reduce
or waive your annual fee. Negotiate.
- Review the following information about the
plans:
Annual fee
What is the annual fee, if any?
Grace period
What is the grace period for purchases? (Grace
periods usually do not apply to cash advances,
which begin accruing interest from the day of
the transaction.)
Other features
Does the plan offer enhancements that are attractive
to you, such as cash rebates, purchase protections,
warranties or guarantees, travel accident or automobile
rental insurance, discounts on goods and services
purchased, and incentives for use, such as frequent
flyer miles? Are these features available at no
extra cost?
Deciphering the Information in a Credit Card Solicitation or
Application
Certain key pieces of information must be included
in all solicitations or applications for credit
cards. Look for a box similar to the one below
for information about interest rates, fees, and
other terms for the card you are considering.
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2.9% until 11/1/00
after that, 14.9%
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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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Your APR for purchase transactions may vary.
The rate is determined monthly by adding
5.9% to the Prime Rate **
|
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25 days on average |
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Average daily balance (excluding new purchases)
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None |
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$.50 |
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* Explanation
of penalty. If your payment arrives more than ten
days late two times within 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. APR
for purchases
The interest rate you will pay, on an annual basis,
if you carry over balances on purchases from one
billing cycle to the next. If the card has a temporary
introductory rate, the rate that applies after the
temporary rate expires is also stated.
Other
APRs
The interest rates you will pay, on an annual
basis, if you get a cash advance on your credit
card, if you transfer a balance from another credit
card, or if the card issuer applies penalty rates.
(More information on the penalty rate may be included
outside the disclosure box--for example, in a
footnote.)
Variable-rate
information
If the card has a variable rate instead of a fixed
rate, this section will tell you how the variable
rate is determined. (More information may be included
outside the disclosure box--for example, in a
footnote.)
Grace
period for repayment of balances for purchases
The number of days you have to pay your bill in
full without triggering any finance charges. With
most plans, the grace period applies only to purchases;
cash advances and balance transfers may start
accruing interest immediately.
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 annual fee (or other periodic fee) the issuer
charges for you to have the card. You may have
to pay this fee even if you never use the card.
Minimum finance charge
Any minimum or fixed finance charge that could
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
Any charge imposed when you use the card for a
cash advance. If the card charges transaction
fees for purchases, these fees will also be stated
here.
Balance-transfer fee
A fee for transferring balances from another card
to this card, if any.
Late-payment
fee
The fee imposed if your payment is late, if any.
Over-the-credit-limit
fee
The fee imposed if your charges exceed the credit
limit set for your card, if any.
Cracking the Credit Code
Glossary of Credit
Terms
Annual
fee
A flat, yearly charge similar to a membership
fee
Annual
percentage rate (APR)
A measure of the cost of credit expressed as a
yearly rate. Many credit card plans charge different
APRs for credit used in different ways--for example,
one APR for purchases, another for cash advances,
and still another for balance transfers. Some
plans may increase the APR if a payment is late.
Cash-advance
fee
A fee charged if you obtain a cash advance. This
fee is in addition to the interest rate charged
on the amount of the advance.
Finance
charge
The dollar amount you pay to use credit. Besides
interest costs, the finance charge may include
other charges such as cash-advance fees.
Grace
period
A period of time, often about 25 days, during
which you can pay your credit card bill without
incurring a finance charge. Under nearly all credit
card plans, the grace period applies only if you
pay your balance in full each month. It does not
apply if you carry a balance forward. Also, the
grace period usually does not apply to cash advances,
which may begin accruing interest from the day
of the transaction.
Interest
rate
A measure of the cost of credit, expressed as
a percent. For variable-rate credit card plans,
the interest rate is explicitly 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 will, too. The interest rate on fixed-rate
credit card plans, though not explicitly tied
to changes in other interest rates, can also change
over time. The card issuer must notify you before
the "fixed" interest rate is changed.
A tiered interest rate means that different rates
apply to different levels of the outstanding balance
(for example, 16% on balances of $1 - $500; 17%
on balances above $500).
Late-payment
charge
A charge imposed when your payment is late. If
your payment arrives after the grace period, you
may be charged both a finance charge (the interest
on your outstanding balance) and a late-payment
charge. Some card issuers may also impose a penalty
rate if you have more than one late payment within
several months.
Over-the-limit
fee
A fee imposed when your charges exceed the credit
limit set on your card.
Penalty
rate
The rate that applies under specific circumstances
set out by the card issuer. For example, if you
make 2 late payments within 6 months, a card issuer
may have a policy of raising the interest rate.
Periodic
rate
The rate you are charged each billing period.
For most credit card plans, the periodic rate
is a monthly rate, calculated by dividing the
APR by 12. For example, a credit card with an
18% APR has a monthly periodic rate of 1.5%.
For
more information:
You can find listings of credit card plans,
rates, and terms on the Internet, in personal
finance magazines, and in newspapers.
The following federal agencies are responsible
for enforcing the federal Truth in Lending Act,
the law that governs disclosure of terms for credit
cards. Questions concerning compliance by a particular
financial institution or credit card issuer should
be directed to the institution's regulatory agency.
Federal
Reserve Board
Division of Consumer and Community Affairs
Mail Stop 801
Washington, DC 20551
(202) 452-3693
(regulates state banks that are members of
the Federal Reserve System)
Comptroller
of the Currency
Office of the Ombudsman
Customer Assistance Unit
1301 McKinney Street, Suite 3710
Houston, TX 77010
1 (800) 613-6743
(regulates banks with "national"
in the name or "N.A." after the name)
Federal
Deposit Insurance Corporation
Compliance and Consumer Affairs
550 17th Street, NW
Washington, DC 20429
(202) 942-3100 or 1 (877) 275-3342
(regulates state-chartered banks that are not
members of the Federal Reserve System)
Office
of Thrift Supervision
Consumer Programs
1700 G Street, NW
Washington, DC 20552
(202) 906-6237 or 1 (800) 842-6929
(regulates federal savings and loan associations
and federal savings banks)
National
Credit Union Administration
Office of Public and Congressional Affairs
1775 Duke Street
Alexandria, VA 22314-3428
(703) 518-6330
(regulates federally chartered credit unions)
Federal
Trade Commission
Consumer Response Center
6th and Pennsylvania, NW
Washington, DC 20580
877-FTC-HELP - toll free (877-382-4357)
(regulates finance companies, stores, auto
dealers, mortgage companies, and credit bureaus)
Survey of Credit Card Plans
Every six months the Federal Reserve System
surveys the terms of credit card plans offered
by financial institutions and publishes a report
of the findings. The report includes information
from the largest credit card issuers in the country
as well as other financial institutions that wish
to participate in the survey. The credit terms
shown in the accompanying list are as of January
31, 2004, and are subject to change. You should
contact issuers for current rates and to learn
about other credit card plans.
Codes
Used in the List of Plans
Availability
Refers to availability of card to consumers
N=Nationally
R=Only in selected states
State abbreviation=Only
in state specified
Type of pricing
F=Fixed
V=Variable
T=Tiered, with different
periodic rates for different levels of outstanding
balance. Rate shown applies to the lowest of the
balance tiers.
Index
The interest rate on variable-rate plans is based
on an index. The codes shown in the list of plans
correspond to the following indexes:
1=Prime rate
2=One-month Treasury bill
rate
3=Three-month Treasury
bill rate
4=Six-month Treasury bill
rate
5=One-year Treasury bill
rate
6=Federal funds rate
7=Cost of funds to card
issuer
8=Federal Reserve discount
rate
9=Other
0=Not applicable
Other features
Credit card issuers may add enhancements or other
features to the plan without charging extra fees.
These enhancements may include cash rebates, purchase
protections, warranty guarantees, travel accident
or automobile rental insurance, discounts on goods
and services, and incentives for use such as frequent
flyer miles.
1=Rebates on purchases
2=Extension of manufacturer’s
warranty
3=Purchase protection/security
4=Travel accident insurance
5=Travel-related discounts
6=Automobile rental insurance
7=Non-travel-related goods
and services
8=Credit card registration
9=Reduced introductory
interest rate available
10=Other, not specified
N.R.=Not reported
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Note: "have your credit
card ready" is one of the most widely
used terms on television, especially late
night cable-tv what with all the TV commercials
(and infomercials) asking viewers to get
your credit card ready (to make a purchase).
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