| CHOOSING A CREDIT CARD
Q. Who provides revolving credit?
A. Revolving or open-end credit is becoming increasingly popular
in this country, as more
people have credit cards than ever before. Discover, MasterCard, Optima
and Visa are examples of the many credit cards issued by banks, savings
and loans, and credit unions. In your shopping for a bank credit card,
you need to recognize that credit cards with the Visa and MasterCard
logos or marks are issued by thousands of different savings and loans
and credit unions. Hence,
if you do not like the terms on one Visa card, you can always check with
other issuers to see if
their terms are preferable. Major retailers issue their own credit cards,
and oil companies also
have their cards, although many of the oil companies do not offer revolving
credit, only 30-day
credit (except on purchases of tires, batteries and accessories).
Q. How may I choose a credit card that is right for me?
A. Selecting a credit card is like selecting a suit or dress;
you want a good "fit." Because there
are many card issuers, you have a wide choice among cards. In this section,
we will examine
terms that are typically offered to consumers by banks and other issuers
of credit cards. It is
illegal for card issuers to send you a credit card unless you have asked
for it or unless it replaces a card you previously asked for. Furthermore,
under the TILA, every solicitation for a credit card must contain a brief
disclosure statement. Disclosures more extensive in nature are due before
the first time you use the credit card you have applied for, and specific
disclosures about finance and other charges and transactions are required
with your periodic statement (usually monthly).
In this section we use examples from actual solicitations and explain
how they might affect the
"fit" of the card offered to your own credit needs.
Q. How should I judge the APR shown in the solicitation?
A. The law requires credit grantors to quote the APR and to tell
you the balance calculation
method they use to figure the finance charge you pay. Since credit grantors
use many different
methods to compute that balance to which the APR is applied, credit grantors
who quote
identical APRs may charge you very different dollar finance charges each
month. It depends on
how you use the account and how they calculate the unpaid balance for
assessing the charge.
Q. How do credit grantors figure an account's balance?
A. The most common system used by card issuers is to apply the
APR to the average daily
balance in your account over the billing period. A typical offering of
a credit card states:
Method of Computing the Balances for Purchases Average Daily Balance (including
new purchases)
Occasionally, retailers compute the balance by subtracting payments made
or credits given
during the billing period from the total amount you owe. They refer to
this as the adjusted
balance method. A few credit grantors do not subtract from the balance
any payments made
during the billing period. This previous balance method can cost you more
than the other two
methods; it depends on how you use your account. Other methods also are
employed, but these three methods can be use to illustrate the differences.
For example:
_______________________________________________________________________
Average
Daily Balance Adjusted Balance Previous Balance
Monthly interest rate 1.5% 1.5% 1.5%
Previous balance $500 $500 $500
Payment on 15th day $400 $400 $400
Finance charge $4.50 $1.50 $7.50
Calculation of finance charge Average balance of
$300x1.5% $100x1.5% $500x1.5%
As you can see from these examples, finance charges may vary greatly depending
on how the
credit grantor calculates them. In the first example, the average daily
balance of $300 determines the amount of finance charge owed. The average
daily balance is the average of the $500 owed for half a month and the
$100 ($500 minus $400) owed for the other half. You owe the $500 and the
$100 each for half a month because you paid the $400 in the middle of
the month. In the adjusted balance method, which is used by relatively
few creditors, you owe a finance charge only on the amount owed at the
end of the period. Since you paid $400, and thus only owe $100, you pay
a finance charge only on the $100. In the previous balance method, you
owe a finance charge on the amount owed at the beginning of the pay period--the
entire $500.
Q. Can I avoid paying a finance charge?
A. Many credit cards offer a grace period for prepayments, which
is the time between the end of the billing cycle and the date that you
must pay the entire bill to avoid paying a finance charge. It is usually
between 20 and 25 days. The grace period is shown on the disclosure statement
in the following manner:
Grace period for repayment of the balance for purchases
No finance charges are assessed on current purchases if the balance is
paid in full each month
within 25 days after billing.
Note that the full balance must be paid each month to avoid finance charges
and that the
grace period applies only to purchases. If you obtain a cash advance on
your bank credit card,
you will almost always pay finance charges from the date of the advance
and probably a cash
advance fee as well.
The credit grantor may adjust the grace period under another method of
assessing monthly
charges on your bill called the retroactive or two-cycle balance method.
Under this system, if
your opening balance on your bill was zero, and then you made credit purchases,
but did not pay your entire bill, your next monthly bill will include
a finance charge for these purchases from the dates that they were posted
to your account.
For example, assume that you used a credit card on an account with no
outstanding balance
to buy a $500 item that the credit grantor posted to your account on March
15. Say that the credit grantor bills you on April 1, and you must pay
in full by April 20 to avoid a finance charge.
However, assume further that you make a payment of only $200, which the
credit grantor credits to your account on April 18. Then your next bill
(say May 1) will include a finance charge composed of two parts. One portion
of the finance charge will be for the use of $500 for the period from
March 15 to March 31. The other charge will be for the period from April
1 through April 30. You must read the disclosure statement or cardholder
agreement very carefully to determine whether the card issuer uses this
retroactive method.
Q. Does the APR on a credit card always stay the same?
A. Not if there is a variable-rate provision. More and more credit
card issuers set APRs that vary with some interest-rate index, such as
the market rates on three-year U.S. Treasury bills (T-bills) or the prime
rate charged by banks on short-term business loans. These issuers must
disclose in their solicitation to you that the rate may vary and how the
rate is determined. This may be done by showing the index and the spread.
The latter is the percentage points added to the index to determine the
rate you will pay. An example of a disclosure on a variable-rate credit
card offering is shown below:
Variable Rate Information
Your Annual Percentage Rate may vary quarterly. The rate will be the Prime
Rate as published
in The Wall Street Journal plus 9%. The rate will not go below 15.0% or
exceed 19.9%.
Q. Is there a charge each year for the right to use a credit card?
A. Whereas few, if any, credit cards issued by retailers have annual fees,
some credit cards
issued by financial institutions have annual fees. These may range from
$15 to $25, and perhaps
$35 to $60 for "premium cards" that provide a higher line of
credit. (And charge accounts, such
as American Express or Diners Club, have annual fees that probably exceed
annual fees charged for bank cards.) If you usually pay your credit card
accounts in full each month and do not expect to pay a finance charge,
you should shop for a credit card with no annual fee or one that is low.
However, if you often don't pay the balance in full each month, then a
low APR may be better for you than a low annual fee. A credit card solicitation
must disclose any annual or other periodic fee, and certain other fees
such as transaction, cash advance, and late fees if they are imposed.
Q. What other fees and charges should I look for on the disclosure
statement?
A. In your disclosure statement, you will find a statement something
like the following
(assuming these fees are part of the plan):
Transaction fee for cash advances, and fees for paying late or exceeding
the credit limit
Transaction fee for Cash Advances: 2% of the amount of the advance ($1.00
minimum; $10
maximum). Late payment fee: $15, if the amount due is $2 or more. Over-the-limit
fee: $15.00.
(There may be other fees as well, such as replacement card fees, copy
fees, wire transfer fees,
and insufficient funds fees.)
Unless you expect to be late in your payments, your choice of a card should
not be heavily
influenced by the size of the late fee. An over-the-limit fee may be more
troublesome. Most
credit card issuers set a limit on the amount of credit that they are
willing to provide you at any
one time. To encourage you not to exceed this limit some banks may charge
an over the limit fee.
Unless you keep careful track of your charge slips, it is difficult for
you to know how much you
owe in relation to the credit limit. If you believe that you might be
close to your credit limit from
time to time, you might want to shop for a bank credit card that does
not have an over-the-limit
fee, or a very low charge.
Choosing a Credit Card
A credit card must fit your financial habits. If you often do not
pay your account in full each
month, you will pay more attention to the annual percentage rate (APR)
than someone else who never pays a finance charge. That person will
be more concerned with an annual fee that would be levied.
Just knowing the APR is not enough, since there are different ways
of calculating the
balances against which the APR is applied. If you don't think that
your income will rise if
interest rates go up, you might prefer a credit card with a fixed
APR rather than one with a
variable rate.
If you expect to use the credit card to obtain cash advances, the
cash advance fee is
important to consider. If you have a hard time keeping track of charges
on your credit cards, a
high over-the-limit fee may be worth avoiding. And, if late fees promise
to be a major problem, perhaps you should not take on another credit
card. |
Q. What if I can't get a credit card from a financial institution--either
because of a bad
credit record or because I have not established a credit record?
A. You may want to consider applying for a secured credit card.
This is a credit card issued by a bank or other financial institution
that is secured by a savings account that you have deposited
with the bank or other financial institution. You need to shop carefully
for the best terms.
Generally, you should be able to avoid an application fee. In the past
these have been quite high.
Your line of credit will typically be limited to 90 percent to 100 percent
of your savings account.
In shopping for a secured card, compare the rates paid on savings accounts,
the APR charged and the annual fees. The APR is important, since you are
not likely to be repaying your account in full each month. Also important
are the late fee and any over-limit fee. These are sometimes
quite high on secured credit cards.
Having a secured card may be something like using training wheels on a
bicycle. Once that
you have shown you can handle a revolving credit account, you should ask
the institution that
has issued you the secured credit card to offer you the opportunity to
switch to an unsecured card with more favorable terms. If the offer is
not made, even after you have established a good credit record, apply
for a regular credit card from another financial institution.
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