How will you use your credit card?
The first step in choosing a
credit card is thinking about how you will use it.
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If you expect to always
pay your monthly bill in full--and other features 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. |
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If you sometimes carry
over a balance from month to month, you may be more
interested in a card that carries a lower interest rate
(stated as an annual percentage rate, or APR). |
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If you expect to use your
card to get cash advances, you'll want to look for a
card that carries a lower APR and lower fees on cash
advances. Some cards charge a higher APR for cash
advances than for purchases. |
What are the APRs?
The annual percentage
rate--APR--is the way of stating the interest rate you will pay
if you carry over a balance, take out a cash advance, or
transfer a balance from another card. The APR states the
interest rate as a yearly rate.
Multiple APRs
A single credit card may have several APRs:
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One APR for purchases,
another for cash advances, and yet another for balance
transfers. The APRs for cash advances and balance
transfers often are higher than the APR for purchases
(for example, 14% for purchases, 18% for cash advances,
and 19% for balance transfers). |
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Tiered APRs.
Different rates are applied to different levels of the
outstanding balance (for example, 16% on balances of
$1 to $500 and 17% on balances above $500). |
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A penalty APR.
The APR may increase if you are late in making payments.
For example, your card agreement may say, "If your
payment arrives more than ten days late two times within
a six-month period, the penalty rate will apply." |
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An introductory APR.
A different rate will apply after the introductory rate
expires. |
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A delayed APR. A
different rate will apply in the future. For example, a
card may advertise that there is "no interest until next
March." Look for the APR that will be in effect after
March. |
If you carry over a part of
your balance from month to month, even a small difference in the
APR can make a big difference in how much you will pay over a
year.
Fixed vs. variable APR
Some credit cards are "fixed rate"--the APR
doesn't change, or at least doesn't change often. Even the APR
on a "fixed rate" credit card can change over time. However, the
credit card company must tell you before increasing the fixed
APR.
Other credit cards are
"variable rate"--the APR changes from time to time. The rate is
usually 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 may change, too. Look for information on the credit
card application and in the credit card agreement to see how
often your card's APR may change (the agreement is like a
contract--it lists the terms and conditions for using your
credit card).
How long is the grace period?
The grace period is the number
of days you have to pay your bill in full without triggering a
finance charge. For example, the credit card company may say
that you have "25 days from the statement date, provided you
paid your previous balance in full by the due date." The
statement date is given on the bill.
The grace period usually
applies only to new purchases. Most credit cards do not give a
grace period for cash advances and balance transfers. Instead,
interest charges start right away.
If you carried over any
part of your balance from the preceding month, you may not have
a grace period for new purchases. Instead, you may be charged
interest as soon as you make a purchase (in addition to being
charged interest on the earlier balance you have not paid off).
Look on the credit card application for information about the
"method of computing the balance for purchases" to see if new
purchases are included or excluded. Information on methods of
computing the balance is in the section "How is the finance
charge calculated?"
How is the finance charge calculated?
The finance charge is the
dollar amount you pay to use credit. The amount depends in part
on your outstanding balance and the APR.
Credit card companies use one
of several methods to calculate the outstanding balance. The
method can make a big difference in the finance charge you'll
pay. Your outstanding balance may be calculated
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Over one billing cycle or
two, |
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Using the adjusted
balance, the average daily balance, or the previous
balance, and |
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Including or excluding new
purchases in the balance. |
Depending on the balance you
carry and the timing of your purchases and payments, you'll
usually have a lower finance charge with one-cycle billing and
either
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The average daily balance
method excluding new purchases, |
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The adjusted balance
method, or the previous balance method. |
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Minimum finance charge
Some credit cards have a minimum finance charge.
You'll be charged that minimum even if the calculated amount of
your finance charge is less. For example, your finance charge
may be calculated to be 35 cents --but if the company's minimum
finance charge is $1.00, you'll pay $1.00. A minimum finance
charge usually applies only when you must pay a finance
charge--that is, when you carry over a balance from one billing
cycle to the next.
What are the fees?
Most credit cards charge fees
under certain circumstances:
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Annual fee
(sometimes billed monthly). Charged for having the card
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Cash advance fee.
Charged when you use the card for a cash advance; may be
a flat fee (for example, $3.00) or a percentage of the
cash advance (for example, 3%) |
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Balance-transfer fee.
Charged when you transfer a balance from another credit
card (Your credit card company may send you "checks" to
pay off the other card. The balance is transferred when
you use one of these checks to pay the amount due on the
other card.) |
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Late-payment fee.
Charged if your payment is received after the due date |
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Over-the-credit-limit
fee. Charged if you go over your credit limit on your credit card. |
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Credit-limit-increase
fee. Charged if you ask for an increase in your
credit limit on your credit card |
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Set-up fee.
Charged when a new credit card account is opened |
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Return-item fee.
Charged if you pay your bill by check and the check is
returned for non-sufficient funds (that is, your check
bounces) |
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Other fees. Some
credit card companies charge a fee if you pay by
telephone (that is, if you arrange by phone for payment
to be transferred from your bank to the company) or to
cover the costs of reporting to credit bureaus,
reviewing your account, or providing other customer
services. Read the information in your credit card
agreement to see if there are other fees and charges. |
What are the cash advance
features?
Some credit cards let you
borrow cash in addition to making purchases on credit. Most
credit card companies treat these cash advances and your
purchases differently. If you plan to use your card for cash
advances, look for information about
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Access. Most
credit cards let you use an ATM to get a cash advance.
Or the credit card company may send you "checks" that
you can write to get the cash advance. |
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APR. The APR for
cash advances may be higher than the APR for purchases. |
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Fees. The credit
card company may charge a fee in addition to the
interest you will pay on the amount advanced. |
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Limits. Some
credit cards limit cash advances to a dollar amount (for
example, $200 per cash advance or $500 per week) or a
portion of your credit limit (for example, 75% of your
available credit limit). |
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How payments are
credited. Many credit card companies apply your
payments to purchases first and then to cash advances.
Read your credit card agreement to learn how your
payments will be credited on your credit card account. |
How much is the credit
limit?
The credit limit is the maximum
total amount--for purchases, cash advances, balance transfers,
fees, and finance charges--you may charge on your credit card.
If you go over this limit, you may have to pay an
"over-the-credit-limit fee."
What kind of card is it?
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companies offer several kinds of cards: |
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Secured cards, which require a security deposit.
The larger the security deposit, the higher the credit
limit. Secured cards are usually offered to people who
have limited credit records--people who are just
starting out or who have had trouble with credit in the
past. |
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Regular cards, which do not require a security
deposit and have just a few features. Most regular credit cards
have higher credit limits than secured credit cards but lower
credit limits than premium credit cards. |
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Premium credit cards (gold, platinum, titanium), which
offer higher credit limits and usually have extra
features--for example, product warranties, travel
insurance, or emergency services. |
Does the credit card offer incentives and other features?
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Many
credit card companies offer incentives to use the credit card
and other special features: |
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Rebates (money
back) on the purchases you make |
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Frequent flier miles
or phone-call minutes |
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Additional warranty
coverage for the items you purchase |
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Car rental insurance |
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Travel accident
insurance or travel-related discounts |
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Credit card
registration, to help if your wallet or purse is
lost or stolen and you need to report that all your
credit cards are missing |
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cards may also offer, for a price, |
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Insurance to cover the
payments on your credit card balance if you become
unemployed or disabled, or die. Premiums are usually due
monthly, making it easy to cancel if the payments are
higher than you want to pay or you decide you don't need
the insurance any longer. |
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Insurance to cover the
first $50 of charges if your credit card is lost or
stolen. Under federal law, you are not responsible for
charges over $50. |
Before you sign up to pay for
any of these features, think carefully about whether it will be
useful for you. Don't pay for something you don't need.
How do I find information about credit
cards?
You can find lists of credit
card plans, rates, and terms on the Internet, in personal
finance magazines, and in newspapers. You can get the most
recent information directly from the credit card company--by
phoning the company, looking on the company's web site, or
reading a solicitation or application.
Under federal law, all
solicitations and applications for credit cards must include
certain key information as described below:
APR for purchases.
The annual percentage rate you'll be charged if you
carry over a balance from month to month. If the credit card
has an introductory rate, you'll see both that rate and
the rate that will apply after the introductory rate
expires.
Other APRs.
The APRs you'll be charged if you get a cash advance on
your credit card, transfer a balance from another credit card, or are
late in making a payment. More information about the
penalty rate may be stated outside the disclosure
box--for instance, in a footnote. In this example, if
you make two payments that are more than ten days late
within six months, the APR will increase to 23.9%.
Variable-rate
information. Information
about how the variable rate will be determined (if
relevant). More information may be stated outside the
disclosure box--for instance, in a footnote.
Grace period for
repayment of balances for purchases. The number of
days you'll have to pay your bill for purchases in full
without triggering a finance charge.
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 amount you'll be charged each twelve-month period
for simply having the credit card.
Minimum finance
charge. The minimum, or fixed, finance charge that
will 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. The charge
that will be imposed each time you use the credit card for a
cash advance.
Balance-transfer fee. The fee
that will be imposed each time you transfer a balance
from another credit card.
Late-payment fee.
The fee that will be imposed when your payment is late.
Over-the-credit-limit fee.
The fee that will be imposed if your charges exceed the
credit limit set for your credit card. |
What are your liability
limits?
If your credit card is lost or
stolen--and then is used by someone without your permission--you
do not have to pay more than $50 of those charges. This
protection is provided by the federal Truth in Lending Act. You
do not need to buy "credit card insurance" to cover amounts over
$50.
If you discover that your credit card
is lost or stolen, report it immediately to your credit card
company. Call the toll-free number listed on your monthly
statement. The company will cancel the credit card so that new
purchases cannot be made with it. The company will also send you
a new credit card.
Make a list of your account
numbers and the companies' phone numbers. Keep the list in a
safe place. If your wallet or purse is lost or stolen, you'll
have all the numbers in one place. Take the list of phone
numbers--not the account numbers--with you when you travel, just
in case a credit card is lost or stolen.
What can you do about billing errors?
The federal Fair Credit Billing
Act covers billing errors. Examples of billing error are
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A charge for something you
didn't buy |
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A bill for an amount
different from the actual amount you charged
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A charge for something
that you did not accept when it was delivered |
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A charge for something
that was not delivered according to agreement
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Math errors |
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Payments not credited to
your account |
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A charge by someone who
does not have permission to use your credit card
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If you think your credit card
bill has an error, take the following steps:
- Write to the credit card
company within 60 days after the statement date on the bill
with the error. Use the address for "billing inquiries"
listed on the bill. Tell the company your name and account
number; That you believe the bill contains an error, and why
you believe it's wrong, and the date and amount of the error
(the "disputed amount").
- Pay all the other parts of
the bill. You do not have to pay the "disputed amount" or
any minimum payments or finance charges that apply to it.
If there is an error, you will
not have to pay any finance charges on the disputed amount. Your
account must be corrected.
If there is no error, the
credit card company must send you an explanation and a statement
of the amount you owe. The amount will include any finance
charges or other charges that accumulated while you were
questioning the bill.
What if the item you purchase is damaged?
The federal Fair Credit Billing
Act allows you to withhold payment on any damaged or
poor-quality goods or services purchased with a credit
card--even if you have accepted the goods or services--as long
as you have made an attempt to solve the problem with the
merchant.
The sale must have been for
more than $50 and must have taken place in your home state or
within 100 miles of your home address. You should notify the
credit card company in writing and explain why you are
withholding your payment.
You may withhold the payment
while the credit card company investigates your claim. If you
pay the charges for the goods on your credit card bill before
the dispute is resolved, you will lose your right to make a
claim.
New Credit Card Rules from the Federal Reserve
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