- Shop around for credit card terms that are best
for you.
- Make sure you understand the terms of a credit
card plan before you accept the card.
- Pay bills promptly to keep finance charges as low
as possible.
- Keep copies of sales slips and promptly compare
charges when your bills arrive.
- Draw a line through blank spaces about the total
when you sign receipts.
- Keep a list of your credit card account numbers
and the telephone numbers of each card issuer in
a safe place in case your cards are lost or
stolen.
Chances are you have received offers in
the mail asking if you would like to open credit card accounts.
Frequently, these offers say that you have been
“pre-approved” for the card, with a line of credit
already set aside for your use. Typically, these offers urge you
to accept quickly, “before the offer expires.” However,
before accepting a credit card offer, understand the card's
credit terms and compare costs of similar cards to get the
features and terms you want.
Choosing a Credit Card
Credit card offers may seem attractive, but remember a credit
card is a form of borrowing that usually involves a “finance
charge” —a charge for the convenience of borrowing—and
often other charges as well.
Credit Card Terms
Before selecting a credit card, learn which credit terms and
conditions apply. Each affects the overall cost of the credit you
will be using. Under the Fair Credit and Charge Card Disclosure
Act, you can compare terms and fees before you agree to open a
credit card or charge card (no interest) account. Be sure to
consider and compare the following terms that direct-mail
applications and pre-approved solicitations must reveal.
Annual Percentage Rate. The “annual
percentage rate,” or APR, is disclosed to you when you apply
for a card, again when you open the account, and it is also noted
on each bill you receive. It is a measure of the cost of credit,
expressed as a yearly rate. The card issuer also must disclose
the “periodic rate” —that is, the rate the card
issuer applies to your outstanding account balance to figure the
finance charge for each billing period.
Some credit card plans allow the card issuer to change the annual
percentage rate on your account when interest rates or other
economic indicators (called indexes) change. Because the rate
change is linked to the performance of the index, which may rise
or fall, these plans are commonly called “variable
rate” plans. Rate changes raise or lower the amount of the
finance charge you pay on your account. If the credit card you
are considering has a variable rate feature, the card issuer must
tell you that the rate may vary and how the rate is determined,
including which index is used and what additional amount (the
“margin”) is added to the index to determine your new
rate. You also must be told how much and how often your rate may
change.
Free Period. A free period —also called a
“grace period”— allows you to avoid the finance
charge by paying your current balance in full before the
“due date” shown on your statement. Knowing whether a
credit card plan gives you a free period is especially important
if you plan to pay your account in full each month. If there is
no free period, the card issuer will impose a finance charge from
the date you use your credit card or from the date each credit
card transaction is posted to your account. If your credit card
plan allows a free period, the card issuer must mail your bill at
least 14 days before your payment is due. This is to ensure that
you have enough time to make your payment by the due date.
Annual Fees. Most credit card issuers charge
annual membership or other participation fees. These fees range
from $25 to $50 for most cards, and from $75 on up for premium
“gold” or “platinum” cards.
Transaction Fees and Other Charges. A credit
card also may involve other types of costs. For example, some
card issuers charge a fee when you use the card to obtain a cash
advance, when you fail to make a payment on time, or when you go
over your credit limit. Some charge a flat monthly fee whether or
not you use the card.
Balance Computation Method for the Finance Charge.
If your plan has no free period, or if you expect to pay for
purchases over time, it is important to know how the card issuer
will calculate your finance charge. This charge will vary
depending upon the method the card issuer uses to figure your
balance. The method used can make a difference, sometimes a big
difference, in how much finance charge you will pay —even when
the APR is identical to that charged by another card issuer and
the pattern of purchases and payments is the same. Examples of
how finance charges based on identical APRs can differ are shown
on page 4.
Some of the ways card issuers figure balances for finance charges
are described on pages 4 and 5.
Average Daily Balance (including or excluding
new purchases). The average daily balance method gives you credit
for your payment from the day the card issuer receives it. To
compute the balance due, the card issuer totals the beginning
balance for each day in the billing period and deducts any
payments credited to your account that day. New purchases may or
may not be added to the balance, depending on the plan, but cash
advances typically are added. The resulting daily balances are
added up for the billing cycle and the total is then divided by
the number of days in the billing period to arrive at the
“average daily balance.” This is the most common method
used by credit card issuers.
Adjusted Balance. This balance is computed by
subtracting the payments you made and any credits you received
during the present billing period from the balance you owed at
the end of the previous billing period. New purchases that you
made during the billing period are not included. Under the
adjusted balance method, you have until the end of the billing
cycle to pay part of your balance and you avoid the interest
charges on that portion. Some creditors exclude prior, unpaid
finance charges from the previous balance. The adjusted balance
method usually is the most advantageous to card users.
Previous Balance. As the name suggests, this
balance is simply the amount that you owed at the end of the
previous billing period. Payments, credits, or new purchases made
during the current billing period are not taken into account.
Some creditors also exclude unpaid finance charges in computing
this balance. If you do not understand how the balance on your
account is computed, ask the card issuer. (An explanation of how
the balance was determined must appear on the billing statements
the card issuer provides you and on applications and pre-approved
solicitations the card issuer may send you.)
Costs and Features
Credit terms differ among card issuers, so shop around for the
card that is best for you. Which one is best may depend on how
you plan to use it. If you plan to pay bills in full each month,
the size of the annual fee or other fees, and not the periodic
and annual percentage rate, may be more important. If you expect
to use credit cards to pay for purchases over time, the APR and
the balance computation method are important terms to consider.
In either case, keep in mind that your costs will be affected by
whether or not there is a grace period.
When shopping for a credit card, you probably will want to look
at other factors besides costs —such as whether the credit
limit is high enough to meet your needs, how widely the card is
accepted, and what services and features are available under the
plan. You may be interested, for example, in “affinity
cards” —all-purpose credit cards that are sponsored by
professional organizations, college alumni associations, and some
members of the travel industry. Frequently, an affinity card
issuer donates a portion of the annual fees or transaction
charges to the sponsoring organization, or allows you to qualify
for free travel or other bonuses.
Using a Credit Card
Federal law prohibits card issuers from sending you a credit
card that you did not request. (The issuer may
send you a renewal or substitute card without a request.) Card
issuers are permitted to mail you an application or a
solicitation for a credit card or to ask you by phone whether you
want to receive a card —and to send you one if you say yes.
Credit Card Protections
Federal law protects consumers when they use credit cards. The
protections include the following items.
Prompt Credit for Payment. A card issuer must
credit your account on the day the issuer receives your payment,
unless the payment is not made according to the creditor's
requirements or the delay in crediting to your account does not
result in a charge. To avoid delays that could result in finance
charges, follow the card issuer's instructions about where to
send payments. Payments sent to other locations could delay
getting credit for your payment for up to five days. If you lose
your payment envelope, look on the billing statement for the
address for payments or call the card issuer.
Refunds of Credit Balances. When you return
merchandise or pay more than you owe, you have the option of
keeping the credit balance on your account or requesting a refund
(if the amount exceeds $1.00). To obtain a refund, write the card
issuer. The card issuer must send you the refund within seven
business days of receiving your request. (Also, if a credit
balance remains on your account for more than six months, the
card issuer must make a good faith effort to refund the credit
balance.)
Errors on Your Bill. Federal law provides
specific rules that the card issuer must follow for promptly
correcting billing errors. The card issuer will give you a
statement describing these rules when you open the credit card
account and, after that, at least once a year. In fact, many card
issuers print a summary of your rights on each bill they send
you.
You must notify the card issuer in writing at the address
specified for billing errors when you find an error, and you must
do so within 60 days after the first bill containing the error
was mailed to you. (For this reason, keep your credit card
receipts and promptly compare them when your bills arrive.) In
your notification letter, include your name, your account number,
the amount of the suspected error, and the reason why you believe
that the bill contains an error. The card issuer, in turn, must
look into the problem and either correct the error or explain to
you why the bill is correct. This must occur within two billing
cycles and not later than 90 days after the issuer receives your
billing error notice. During the period that the card issuer is
investigating the error, you do not have to pay the amount in
question. (For further information, write: “Credit Billing
Errors,” Public Reference, Federal Trade Commission,
Washington, D.C. 20580.)
Unauthorized charges. Under federal law, if your credit card is
used without your authorization, you can be held liable for up to
$50 per card. If you report the loss before the card is used,
federal law says the card issuer cannot hold you responsible for
any unauthorized charges. If a thief uses your card before you
report it missing, the most you will owe for unauthorized charges
is $50. This is true even if a thief is able to use your credit
card at an automated teller machine (ATM) to access your credit
card account. To minimize your liability, report the loss of your
card as soon as possible. Some companies have toll-free numbers
printed on their statements and 24-hour service to accept such
emergency information. For your own protection, you should follow
up your phone call with a letter to the card issuer. The letter
should give your card number, say when your card was missing, and
mention the date you called in the loss.
Disputes about Merchandise or Services. If you
have a problem with merchandise or services that you charged to a
credit card, and you have made a good faith effort to work out
the problem with the seller, you have the right to withhold from
the card issuer payment for the merchandise or services. You can
withhold payment up to the amount of credit outstanding for the
purchase, plus any finance or related charges. If the card you
used is a bank card, a travel and entertainment card, or another
card not issued by the seller of the defective merchandise, you
can withhold payment only if the purchase exceeded $50 and
occurred in your home state or within 100 miles of your billing
address. If these conditions do not apply to you, you may want to
consider filing an action in small claims court —an informal
legal proceeding that can be used to settle disputes. While the
maximum amounts that can be claimed or awarded differ from state
to state, most small claims courts hear cases involving amounts
ranging from $25 to $2,000. Some states have recently raised
their limits to $5,000. Check your local telephone book under
your municipal, county, or state government headings for small
claims court listings.
Some Suggestions
- Shop around for credit card terms that are best for you.
- Make sure you understand the terms of a credit card plan before
you accept the card. Review the disclosures of terms and fees
that must appear on credit-card offers you receive in the mail.
- Pay bills promptly to keep finance charges as low as possible.
- Keep copies of sales slips and promptly compare charges when
your bills arrive.
- Protect your credit cards and account numbers to prevent
unauthorized use. Draw a line through blank spaces above the
total when you sign receipts. Rip up or retain carbons.
- Keep a list of your credit card numbers and the telephone
numbers of each card issuer in a safe place in case your cards
are lost or stolen.
Where To Go For Help
The following federal agencies are responsible for enforcing
federal laws that govern credit card transactions. Questions
concerning a particular card issuer should be directed to the
enforcement agency responsible for that issuer.
State Member Banks of the Reserve System
Consumer and Community Affairs
Board of Governors of the Federal Reserve System
20th & C Sts., N.W.
Washington, D.C. 20551
National Banks
Comptroller of the Currency
Compliance Management
Mail Stop 7-5
Washington, D.C. 20219
Federal Credit Unions
National Credit Union Administration
1776 G St., N.W.
Washington, D.C. 20456
Non-Member Federally Insured Banks
Office of Consumer Programs
Federal Deposit Insurance Corporation
550 Seventeenth St., N.W.
Washington, D.C. 20429
Federally Insured Savings and Loans, and Federally
Chartered State Banks
Consumer Affairs Program
Office of Thrift Supervision
1700 G St., N.W.
Washington, D.C. 20552
Other Credit Card Issuers
(includes retail/gasoline companies)
Division of Credit Practices
Bureau of Consumer Protection
Federal Trade Commission
Washington, D.C. 20580
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