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Using your credit cards wisely is largely a matter of being informed — e.g., how much your card company is charging you for credit — and by following some simple tips for using the card. Table of Contents
Examine The Card's TermsTo choose a credit card wisely, you must first review and understand the terms and features of the various cards. This can add up to very respectable savings over a period of time. In addition, you should also know how use your cards wisely to keep your costs to a minimum. The Financial Guide explains how to achieve these goals. 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, often with a very attractive interest rate (usually, a short-term "low-ball" rate) and with a line of credit purportedly set aside for your use (although few people ultimately qualify for the credit line in the promotional literature). 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 terms and features you want. Making an informed decision about a credit card is largely a matter of finding out what the actual cost of credit is under that card. Credit cards involve not only a "finance charge" — a charge for the convenience of borrowing — but usually other, less obvious charges as well. Learn which credit terms and conditions apply. Each affects the overall cost of the credit you will be using. Due to the provisions of 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 terms listed below, which both direct-mail applications and pre-approved solicitations must reveal. Which card is best for you 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 also be affected by the grace period. Annual Percentage RateThe "annual percentage rate," or APR, is disclosed to you when you apply for a card, again when you open the account, and 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," the rate the card issuer applies to your outstanding account balance to figure the finance charge for each billing period. Variable RatesSome 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 PeriodA 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 grace period and the length of this 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 allows a grace period, the card issuer must mail your bill at least 14 days before your payment is due. This policy ensures that you have enough time to make your payment by the due date.
Annual FeesMost 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 (with the American Express Platinum costing $450 with a $175 charge for additional cards). Transaction Fees and Other ChargesA 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 ChargeIf 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. Average Daily BalanceThe average daily balance method (including or excluding new purchases) 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 BalanceThis 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 BalanceAs 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.) Considerations Other Than CostWhen shopping for a credit card, you probably will want to look at other factors besides cost—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. How Different Balance Computations Affect The Cost of Credit"While the interest rate is a major factor in determining your interest cost, the method of computing the balance to which the interest rate is applied can also be significant. The following table shows how your interest cost can vary when the Average Daily Balance, Adjusted Balance and Previous Balance methods are used."
* To figure average daily balance (including new purchases): ($400 x 15 days) + ($100 x 3 days) + ($150 x 12 days) divided by 30 days = $270 ** To figure average daily balance (excluding new purchases): ($400 x 15 days) + ($100 x 15 days) divided by 30 days = $250
As you can see, the finance charge varies based upon which balance is used and whether new purchases are included or excluded. Rebate Cards: Are They a Good Deal?The use of rebates has grown rapidly. About one-quarter of the hundreds of millions of credit cards in use offer rebates. Credit card solicitations promise cash, frequent-flier miles or points that will buy everything from gas to video rentals. Blockbuster, Egghead Software, Sam Goody, Toys "R" Us and Waldenbooks, among others, sponsor credit cards that give rebates on the cost of merchandise you buy with the card, once you send in a rebate form and proof of purchase. You usually get larger rebates on the sponsoring company's products and lower rebates on other card charges.
Use It WiselyHere are some suggestions for the use of credit cards: 1. Pay bills promptly to keep finance charges as low as possible.
2. 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. 3. Protect your credit cards and account numbers to prevent unauthorized use.
4. Deal only with reliable firms. Check with your local consumer protection agency or the Better Business Bureau (BBB) nearest to where the business is located. Study the advertising offer carefully. Ask the company about its warranty, refund and exchange policies. If you cannot get the answers to your questions, or there are any doubtful claims, don’t buy. 5. Never Send Cash. Never give out your credit, debit charge card, or bank account number unless you have checked out the company or have done business with them before.
How To Dispute Improper ChargesIf there is a problem with your order — you were billed for the wrong amount, you never got the product, the goods arrived in damaged condition, or the merchandise or services were misrepresented—try to resolve it by following these steps: When you have charged your purchase, you are entitled to a response to your complaint within 30 days, and the problem must be resolved within two billing cycles (but not more than 90 days). If you used a debit card, you are entitled to a response within 10 days. However, if the financial institution that issued the card needs more time, it may take up to 45 days, provided it credits your account with the disputed amount until the dispute is resolved.
Recommended Books
Government and Non-Profit AgenciesThe following 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.
The Federal Trade Commission does not handle individual complaints, but reporting failure to deliver, late delivery, unordered merchandise, misrepresentation or fraud helps uncover widespread abuses that the FTC might take action to stop.
The Federal Communications Commission will handle requests for action on suspected violations of the Telephone Consumer Protection Act, such as persistent sales calls after the seller is told to stop.
>Mail and Telephone Preference Services should be contacted if you wish to have your name removed from mail or telephone lists of many companies. You may also contact the Direct Marketing Association.
Low-Cost Credit Cards: Bankcard Holders of America lists banks charging no fees and low interest rates for their conventional credit cards. To obtain a copy of the list, write to:
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