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CONTENTS
Definition of Terms
Calculation of Finance Charge
Credit Card Owner's Checklist
Survey Results
Survey
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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
article. 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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Definition
of Terms |
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Annual
Fee
A flat, yearly charge similar to a membership fee
Annual Percentage Rate
(APR)
A measure of the cost of credit that expresses the finance charge, which
includes interest and may also include other charges, as a yearly rate.
Finance Charge
The dollar amount you pay to use credit. Besides interest costs, it may
include other charges associated with transactions such as cash advance
fees.
Grace Period
A time, about 25 days, during which you can pay your credit card bill
without paying a finance charge. Under almost all credit card plans, the
grace period only applies if you pay your balance in
full each month. It does not apply if you carry a balance forward. Also,
the grace period does not apply to cash advances.
Interest Rate
Interest rates on credit card plans change over time. Some are
explicitly tied to changes in other interest rates such as the prime
rate or the Treasury Bill rate and are called variable rate
plans. Others are not explicitly tied to changes in other interest rates
and are called fixed rate plans. 
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Variables
and Impact
Calculation
of Finance
Charge |
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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 periodóthat 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 youíve 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 donít 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 ìmarginî, 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, ìthe multipleî,
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
In this example, the average monthly balance carried forward equals
$2,500, which is about the national average for consumers with credit card
debt.
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Plan
Descriptions:
| Terms |
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Plan A |
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Plan B |
Average
monthly balance |
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$2,500 |
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$2,500 |
| APR |
x |
.18
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x |
.14
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Amount paid in
finance charges
annually |
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$450 |
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$350 |
| Annual Fee |
+ |
$ 20
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+ |
$ 0
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| Total Cost |
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$470 |
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$350 |
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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 ñ $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.
- Review all of the information about the plans.
- Draft a list of desired features that best fit your needs
and rank them according to how you plan to use the card.
- Call the institutions you've selected to verify the
information and to see if they have any other plans available.
- If you are a current card holder and have a good credit
rating, see if the institution that issued your card will
lower your current rateóNegotiate.
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Survey
Results |
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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. |
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
F = fixed
V = variable
T = tiered pricing, with different periodic rates applying to different
levels of the outstanding balance. The 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 credit card plan list 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
8 = Federal Reserve discount rate
9 = other
Grace Period
Indicates that no finance charge will be imposed for credit extended on
purchases if payment in full is received by the payment due date after
the end of the billing period in which the purchase was made. Generally,
a grace period allows customers to avoid finance charges on purchases if
they always pay their credit card bill in full by the due date of the
bill. Grace periods usually do not apply to cash advances, which begin
accruing interest from the day of the transaction.
Other Features
Credit card issuers may automatically add enhancements or other features
in the plan without charging extra fees. Enhancements can include cash
rebates, purchase protections, warranty guarantees, travel accident or
automobile rental insurance, discounts on goods and services purchased,
and usage incentives such as frequent flyer miles.
| 1 |
= |
rebates on purchases |
| 2 |
= |
extension of manufacturerís warranty |
| 3 |
= |
purchase protection/security |
| 4 |
= |
travel accident insurance |
| 5 |
= |
travel related discounts |
| 6 |
= |
automobile rental insurance |
| 7 |
= |
nontravel related goods or services |
| 8 |
= |
credit card registration |
| 9 |
= |
reduced introductory interest rate available |
| 10 |
= |
other (not specified) |
| N.R. |
= |
not reported |
The current survey is available in Adobe Acrobat as a PDF file as
well as in ASCII. Obtain
the Acrobat Reader.
22K PDF
| Shop text
Date of This Survey
This Survey is conducted semi-annually. The credit terms shown in this
article were in effect as of July 31, 1999.
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