A credit card is a form of borrowing that often involves charges.
Credit card terms and conditions affect your overall cost. So
it’s wise to compare terms and fees before you agree to open
a charge or credit 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 credit card application.
You also may want to ask about these terms when you’re shopping
for a credit card.
Annual Percentage Rate. The
APR is a measure of the cost of the credit card, expressed as
a yearly rate. It also must be disclosed before you become obligated
on the account and on your account statements.
The credit 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 credit card,
the issuer must also provide 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 issuer’s 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.
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 cardholders. 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.
