CHOOSING A CREDIT CARD
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Credit card offers are everywhere - - in your mailbox, on the Internet, and in radio and television advertisements. Who hasn’t received a “pre-approved” credit card solicitation in the mail, or been bombarded with advertisements offering credit cards with perks such as low introductory rates, no annual fee, membership rewards or “cash back” for using the card? |
Those perks sound great. But are they hiding consumer-unfriendly practices such as universal default, two-cycle billing, balance transfer fees, retroactive interest hikes and penalty interest rates for paying your bill late – even once? You need to know before you choose a credit card.
Below is a guide to shopping around for the best terms, avoiding the pitfalls, and choosing the credit card that’s right for you. There are also links to websites with additional information, including credit card surveys - - highlighting the cards which offer the lowest fees and interest rates, and the best terms and features. There is also a link to a credit card debt calculator that shows you how much you will pay in interest and how long it will take to pay off your credit card balance.
How Will You Use Your Credit Card?
| If you intend to pay your bill in full each month, and won’t incur any finance charges, you want a card with no annual fee and a long grace period. A low interest rate won’t matter to you. If, however, you expect to carry a balance from month to month, then you want a card with a low interest rate. You’ll also want to look at how finance charges are calculated, as the method varies from card-to-card. |
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What is the Grace Period?
The grace period lets you avoid finance charges by paying your balance in full before the due date. If your card includes a grace period, the issuer must mail your bill at least 14 days before the due date so you'll have enough time to pay. The length of the grace period can vary from card-to-card. The grace period usually does not apply to cash advances or balance transfers, where interest starts to accrue immediately. If you have an unpaid balance from the previous month, there may not be a grace period for new purchases.
What Happens If I Don’t Pay on Time?
If you don’t pay your bill on time (i.e., before the expiration of the grace period), a late fee will be charged. Late payments can also result in penalty (i.e., higher) interest rates being applied. Depending on the terms and conditions of the card, even a single late payment can result in penalty interest rates.
What is the Annual Percentage Rate?
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The annual percentage rate, or APR, is the interest rate you will pay if you carry a balance from month to month, take a cash advance, or transfer a balance from another card. These vary widely. The lower the APR, the less you will pay in finance charges. The card issuer also must disclose the "periodic rate" - the monthly or daily rate applied to your outstanding balance to figure the finance charge for each billing period. Some credit cards have fixed APR’s, where the interest rate is fixed for a period of time. Other credit cards have variable rates, and allow for changes in the APR based on changes in the prime interest rate or some other economic indicator. |
What is an Introductory Interest Rate?
Some credit card issuers offer a low, introductory “teaser” interest rate to new customers. However, these low introductory rates often apply for only a short period of time. Once the introductory offer period has expired, a higher interest rate will apply.
How are Finance Charges Calculated?
The finance charge is the amount you pay to use credit. It is calculated by multiplying your outstanding balance by the periodic interest rate. Credit card companies use different methods to determine your outstanding balance. The method can make a huge difference in the finance charge you’ll pay. You want to avoid credit cards that use “two-cycle billing” to calculate the outstanding balance.
What is Two-Cycle Billing?
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Two-cycle billing calculates interest based on two billing cycles, instead of the more common method of determining interest only on the immediate billing cycle. Two-cycle billing penalizes customers who carry a balance, even if only on occasion. For example, a cardholder begins a billing cycle with a zero balance, charges $1000 and makes an on-time payment of $900. Under one-cycle billing, the cardholder will pay interest only on the unpaid portion of the bill, or $100. However, under double-cycle billing, the cardholder will be charged interest on the full $1000 from the date of purchase, rather than on the $100 still owed. In other words, the cardholder will pay interest on the portion of the bill that was already paid. And even if the cardholder pays off the balance in full in the next billing cycle, interest will still be charged for the time between the close of the billing cycle and the date payment is received. Consumers should avoid credit cards that use two-cycle billing. |
What are the Fees?
Many credit cards charge fees to cardholders. These include:
Annual fee: Yearly charge for
having the card
Balance-transfer fee: Charge
for transferring a balance from another card
Late-payment fee: Charge for
payments received after the due date
Exceeding the credit limit
fee: Charge for going over the credit limit
Membership rewards fee: Charge for participating in a rewards program
Shop around for a card that has the lowest fees. Many cards have no annual fee.
What is Universal Default?
Universal default is when a credit card issuer increases your interest rate due to a late payment on another credit account, such as a mortgage, auto loan or another credit card. Under universal default, your interest rate on a credit card can be hiked even if all payments on that card have been made on a timely basis.
What is a Retroactive Interest Hike?
Some credit cards allow the cardholder to be charged a higher interest rate on balances incurred before a rate increase went into effect.
What is a Balance Transfer Fee?
Most credit card issuers charge a fee for transferring a balance from another card.
How Do I Find Out About the Terms and Conditions of A Credit Card?
All solicitations and
applications for a credit card have a “disclosure box” that includes key
information. The disclosure box must state:
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What about Reward Programs?
Many credit card issuers offer rewards for usage, such as cash back, airline travel miles and merchandise rebates. However, the rewards may cost you more than they’re worth. Cards with rewards programs often have annual fees and higher interest rates than regular credit cards. In addition, there are usually limits on the rewards programs, such as a cap on the number of points or miles you can earn or an expiration date on the use of rewards. Travel rewards can be hard to use because the airlines have blackout dates and restrict the number of seats on each flight than can be reserved through reward programs.
What about Other Credit Card Features?
Some credit card issuers offer features at no additional cost, such as purchase protection, extension of manufacturer’s warranty, travel accident or automobile rental insurance, and discounts on goods and services. Choose a card offering features that best suit your needs.
What About Department Store Credit Cards?
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Department stores often entice customers by offering a discount on the initial purchase after you sign up for a store-issued credit card. However, department store credit card interest rates tend to be sky high, so any initial savings are quickly offset if the bill for the discounted merchandise is not paid in full. Many people establish their credit rating with a department store credit card because it is much easier to get a department store card than it is to get a Visa or Mastercard. But the high interest rates for department store cards make them an unattractive option for people with established credit who can obtain cards from other issuers. |
What is My Liability Limit if My Card is Lost or Stolen?
Under federal law, your liability is limited to $50. If you discover that your card is lost or stolen, report it to the credit card issuer immediately.
What if There’s a Billing Error?
Write to the credit card company within 60 days of receiving the bill that contains the error. Even if the company accepts complaints by telephone, you must also follow-up in writing to preserve your rights under federal law.
What if I Received Damaged Goods?
After you have made a good faith effort to resolve the issue with the seller, you can dispute charges for unsatisfactory goods or services, or for goods or services you did not receive. To receive the protections of federal law, the purchase must have been made in your home state or within 100 miles of your home, and the charge must have been for more than $50. However, many credit card issuers will allow you to dispute a charge even if you do not meet those requirements. You should notify the credit card company in writing and explain why you are withholding payment. Even if the company accepts complaints by telephone, you must also follow-up in writing to preserve your rights. The ability to dispute charges for unsatisfactory goods or services is one of the major advantages of using a credit card. You do not have to pay while the credit card company investigates your complaint. However, if you pay by cash or by check, the money is out of your hands immediately and you have far less leverage in resolving your complaint.
Where Can I Get More Information?
The following web sites offer detailed information about credit cards.
The Federal Reserve has a user-friendly explanation of commonly used credit card terminology, and a survey of major credit cards that is updated twice yearly. Survey includes information such as annual fee, annual percentage rate, length of grace period, and features such as rebates on purchases, extension of manufacturer’s warranty, purchase protection/security, travel related insurance, travel related discounts and automobile rental insurance.
The Federal Trade Commission explains credit card terminology and has information on where/how to file a complaint.
Consumer Action – The website of this nonprofit advocacy group explains how consumer-unfriendly practices - - such as universal default, penalty interest rates, two-cycle billing, balance transfer fees and retroactive interest hikes - - can work against you. Also has an annual survey of credit cards which highlights card with the lowest interest rates, lowest annual fees, zero interest balance transfers with no transfer fees, and the most robust reward programs.
The American Institute of Certified Public Accountants offers advice on choosing a credit card.
The Credit Card Nation offers advice on choosing and using a credit card, including “Top Ten Tips.” Also has a credit card debt calculator for determining how much you will pay in interest in addition the original purchase price, and how long it will take to pay off the current balance due on your credit card.
(www.westchestergov.com/consumer)
Please note that the Department of Consumer protection does not endorse the websites listed, nor does the department advocate the accuracy of any of the information on these sites, approve any of their affiliations or funding sources, or endorse any of the opinions expressed on these outside websites. If you have a question or comment about any of these sites, please contact them directly.