Choosing the
Right Credit Card Can Save You Money
by
the Federal Reserve
Smart consumers comparison shop for credit, whether they're
looking for a mortgage, an auto loan, or a credit card. Comparison
shopping is important because it could save you money. When you're looking for a credit card, be sure to consider the
costs and terms. They can make a difference in how much you pay for
the privilege of borrowing. Compare them with the costs and terms of
the cards you already have to find the plan that best fits your
spending and repayment habits. Key costs and terms to consider are the annual percentage rate
(APR) for goods and services as well as for cash advances, the
annual fee, and the grace period. Also compare cash-advance fees,
late-payment charges, and over-the-limit fees.
Besides looking at these costs and terms, think about your
typical bill-paying behavior. Do you pay your outstanding balance in
full each month? Or do you usually carry over a balance? Matching
the credit card plan to your needs could save money. Credit Card Interest Rates Credit card issuers offer variable-rate, fixed-rate, and
tiered-rate plans. For variable-rate credit card plans, the interest
rate is calculated according to a formula. Three of the most
commonly used formulas are
Index + Margin = Variable Rate
Index x
Multiple = Variable Rate
(Index + Margin) x Multiple = Variable
Rate
The most common indexes used by credit card issuers are the prime
rate; the one-, three- and six-month Treasury bill rates; the
federal funds rate; and the Federal Reserve discount rate. Most of
the indexes are published in the money or business section of major
newspapers. If the index rate used for your credit card changes, the
rate on your card will, too. The margin is a number of percentage points chosen by the credit
card issuer. The card issuer also chooses the multiple. The interest rate on a fixed-rate credit card plan, though not
explicitly tied to changes in another interest rate, also can change
over time. The card issuer must notify you before the "fixed" interest rate is changed. A tiered interest rate means that different rates apply to
different levels of the outstanding balance (for example, 16% on
balances of $1 - $500; 17% on balances above $500). Some card issuers may have a policy that raises your interest
rate if you make late payments. For example, if you make 2 late
payments within 6 months, the card issuer may raise your interest
rate from 18% APR to 24% APR. If such a penalty rate applies to your
card, the issuer must include a notice in the solicitation
materials. Card issuers may also charge different rates for different types
of transactions. For example, the card may carry one rate for
purchases of goods and services, another rate for cash advances, and
still another rate for balance transfers. How Much Will You Pay? The finance charge--that is, the dollar amount you will pay to
use credit--depends on your outstanding balance and the periodic
rate in your credit card plan:
Finance Charge = Outstanding Balance x
Periodic Rate
What Is the Outstanding
Balance?
The outstanding balance can be calculated in
several ways, and the method of calculation can make a big
difference in the finance charge you will pay:
- Average daily balance method including new purchases. The
balance is the sum of the outstanding balances for every day in
the billing cycle (including new purchases and deducting payments
and credits) divided by the number of days in the billing cycle.
- Average daily balance method excluding new purchases. The
balance is the sum of the outstanding balances for every day in
the billing cycle (excluding new purchases and deducting payments
and credits) divided by the number of days in the billing cycle.
- Two-cycle average daily balance method including new
purchases. The balance is the sum of the average daily balances
for two consecutive billing cycles. One daily balance, that for
the current billing cycle, is calculated by summing the
outstanding balances for every day in the billing cycle (including
new purchases and deducting payments and credits) and dividing
that total by the number of days in the billing cycle. The other
daily balance is that from the preceding billing cycle.
- Two-cycle average daily balance method excluding new
purchases. The balance is the sum of the average daily balances
for two consecutive billing cycles. One daily balance, that for
the current billing cycle, is calculated by summing the
outstanding balances for every day in the billing cycle (excluding
new purchases and deducting payments and credits) and dividing
that total by the number of days in the billing cycle. The other
daily balance is that from the preceding billing cycle.
- Adjusted balance method. The balance is the outstanding
balance at the beginning of the billing cycle minus payments and
credits made during the billing cycle.
- Previous balance method. The balance is the outstanding
balance at the beginning of the billing cycle.
Depending on the balance you carry and the timing of your
purchases and payments, the average daily balance method excluding
new purchases, the adjusted balance method, and the previous balance
method tend to result in lower finance charges than the other
balance-calculation methods. What Is the Periodic
Rate?
The periodic rate is the rate you are charged each
billing period. Usually the periodic rate is the monthly interest
rate, calculated by dividing the card's APR by 12. If your card has
different rates for different types of transactions, then different
periodic rates will apply to those balances. For example, if your
card has a 12% APR on purchases, the periodic rate for purchases is
1%; and if your card has a 24% APR on cash advances, the periodic
rate for cash advances is 2%. The Right Card for You While the outstanding balance and the periodic rate are important
factors in choosing a credit card, they shouldn't be your only
considerations. Other plan features may be more important to you,
depending on how you use the card. For example, if you don't always
pay your monthly bill in full, you'll probably be more interested in
a card that carries a lower APR. On the other hand, if you always
pay your monthly bill in full and card enhancements 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. The grace period is the number of days between the statement date
and the due date during which you can pay your bill without
incurring a finance charge. The card issuer may refer to the
beginning or ending point of the grace period and tell you about any
conditions that apply. For example, the issuer may say you have "25
days from the statement date, provided you have paid your previous
balance in full by the due date." Keep in mind that the statement
date is not the date on which you receive the bill; it is the date
on which the issuer prepares the statement, which may be a week or
two before you actually receive the bill in the mail. How Much Could You Save? The following example illustrates the annual savings you could
achieve by switching to a credit card plan with a lower APR and no
annual fee. The average monthly balance used in this simplified
example is around the national average for consumers with credit
card debt.
| Terms |
Plan A |
Plan B |
| Average monthly
balance |
$2,500 |
$2,500 |
| APR |
x 18% |
x 14% |
| Amount paid in finance
charges annually |
$450 |
$350 |
| Annual fee |
+ $20 |
+ $0 |
| Total cost |
$470 |
$350 |
By switching to a credit card plan with a lower APR and no annual
fee, you could save $120 annually. Of course, this example assumes
that the interest rate is applied to a constant balance of $2,500
and that you make all payments on time; if you paid down some of the
balance each month, the amount paid in finance charges annually
would be less. Also, if you make a payment late, you may incur
additional fees that will increase your cost. Credit Card Shopper's Checklist Here are some tips for shopping for a credit card or evaluating
the cards you already have.
1. Make a list of features that best fit your needs, and rank
them according to how you plan to use the card.
2. Call the
issuers of the cards that seem to match your needs to verify the
publicized information. Ask if they have any other plans
available.
3. If you are currently a cardholder and have a good
credit rating, ask the issuer of your card to lower your current
rate or to reduce or waive your annual fee. Negotiate.
4.
Review the following information about the plans:
Availability
Is the card
accepted nationally? Regionally? Only in one state? Only in a
specific store?
Interest rate pricing
Is
the interest rate fixed? Variable? Tiered? If the rate is
variable, what is the index? The margin? The multiple?
APR
What is the APR for
purchases? For cash advances? For balance transfers? Is there a
penalty rate if you make late payments?
Finance charge
What method
for determining the outstanding balance is used to calculate the
finance charge?
Annual fee
What is the
annual fee, if any?
Grace period
What is the
grace period for purchases? (Grace periods usually do not apply to
cash advances, which begin accruing interest from the day of the
transaction.)
Other features
Does the
plan offer enhancements that are attractive to you, such as cash
rebates, purchase protections, warranties or guarantees, travel
accident or automobile rental insurance, discounts on goods and
services purchased, and incentives for use, such as frequent flyer
miles? Are these features available at no extra cost?
Deciphering the Information in a Credit Card
Solicitation or Application Certain key pieces of information must be included in all
solicitations or applications for credit cards. Look for a box
similar to the one below for information about interest rates, fees,
and other terms for the card you are considering.
Annual
percentage rate
(APR) for purchases |
2.9% until 11/1/00
after that, 14.9% |
| Other APRs |
Cash-advance APR: 15.9%
Balance-transfer APR:
15.9%
Penalty rate: 23.9% See explanation below. * |
| Variable-rate
information |
Your APR for purchase transactions may vary. The rate is
determined monthly by adding 5.9% to the Prime Rate ** |
Grace period for repayment
of
balances for purchases |
25 days on average |
Method of computing
the
balance for purchases |
Average daily balance (excluding new purchases) |
| Annual fees |
None |
| Minimum finance charge |
$.50 |
Transaction fee for cash advances: 3% of the
amount advanced
Balance-transfer fee: 3% of the amount
transferred
Late-payment fee: $25
Over-the-credit-limit
fee: $25 |
* Explanation of penalty. If your payment
arrives more than ten days late two times within a six-month
period, the penalty rate will apply.
** The Prime Rate used
to determine your APR is the rate published in the Wall Street
Journal on the 10th day of the prior
month. |
APR for purchases
The
interest rate you will pay, on an annual basis, if you carry over
balances on purchases from one billing cycle to the next. If the
card has a temporary introductory rate, the rate that applies after
the temporary rate expires is also stated. Other APRs
The interest
rates you will pay, on an annual basis, if you get a cash advance on
your credit card, if you transfer a balance from another credit
card, or if the card issuer applies penalty rates. (More information
on the penalty rate may be included outside the disclosure box--for
example, in a footnote.) Variable-rate information
If
the card has a variable rate instead of a fixed rate, this section
will tell you how the variable rate is determined. (More information
may be included outside the disclosure box--for example, in a
footnote.) Grace period for repayment of balances
for purchases
The number of days you have to pay your bill
in full without triggering any finance charges. With most plans, the
grace period applies only to purchases; cash advances and balance
transfers may start accruing interest immediately. 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 annual fee
(or other periodic fee) the issuer charges for you to have the card.
You may have to pay this fee even if you never use the card. Minimum finance charge
Any
minimum or fixed finance charge that could 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
Any charge imposed when you use the card for a
cash advance. If the card charges transaction fees for purchases,
these fees will also be stated here. Balance-transfer fee
A fee
for transferring balances from another card to this card, if
any. Late-payment fee
The fee
imposed if your payment is late, if any. Over-the-credit-limit
fee
The fee imposed if your charges exceed the credit
limit set for your card, if any. Cracking the Credit Code
Glossary of
Credit Terms Annual fee
A flat, yearly
charge similar to a membership fee Annual percentage rate
(APR)
A measure of the cost of credit expressed as a
yearly rate. Many credit card plans charge different APRs for credit
used in different ways--for example, one APR for purchases, another
for cash advances, and still another for balance transfers. Some
plans may increase the APR if a payment is late. Cash-advance fee
A fee
charged if you obtain a cash advance. This fee is in addition to the
interest rate charged on the amount of the advance. Finance charge
The dollar
amount you pay to use credit. Besides interest costs, the finance
charge may include other charges such as cash-advance fees. Grace period
A period of
time, often about 25 days, during which you can pay your credit card
bill without incurring a finance charge. Under nearly all credit
card plans, the grace period applies only if you pay your balance in
full each month. It does not apply if you carry a balance forward.
Also, the grace period usually does not apply to cash advances,
which may begin accruing interest from the day of the
transaction. Interest rate
A measure of
the cost of credit, expressed as a percent. For variable-rate credit
card plans, the interest rate is explicitly 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 will, too. The interest rate on
fixed-rate credit card plans, though not explicitly tied to changes
in other interest rates, can also change over time. The card issuer
must notify you before the "fixed" interest rate is changed. A
tiered interest rate means that different rates apply to different
levels of the outstanding balance (for example, 16% on balances of
$1 - $500; 17% on balances above $500). Late-payment charge
A charge
imposed when your payment is late. If your payment arrives after the
grace period, you may be charged both a finance charge (the interest
on your outstanding balance) and a late-payment charge. Some card
issuers may also impose a penalty rate if you have more than one
late payment within several months. Over-the-limit fee
A fee
imposed when your charges exceed the credit limit set on your
card. Penalty rate
The rate that
applies under specific circumstances set out by the card issuer. For
example, if you make 2 late payments within 6 months, a card issuer
may have a policy of raising the interest rate. Periodic rate
The rate you
are charged each billing period. For most credit card plans, the
periodic rate is a monthly rate, calculated by dividing the APR by
12. For example, a credit card with an 18% APR has a monthly
periodic rate of 1.5%. For more information: You can find listings of credit card plans, rates, and terms on
the Internet, in personal finance magazines, and in newspapers. The following federal agencies are responsible for enforcing the
federal Truth in Lending Act, the law that governs disclosure of
terms for credit cards. Questions concerning compliance by a
particular financial institution or credit card issuer should be
directed to the institution's regulatory agency. Federal Reserve
Board
Division of Consumer and Community Affairs
Mail Stop
801
Washington, DC 20551
(202) 452-3693
(regulates state
banks that are members of the Federal Reserve System) Comptroller of the
Currency
Office of the Ombudsman
Customer Assistance
Unit
1301 McKinney Street, Suite 3710
Houston, TX 77010
1
(800) 613-6743
(regulates banks with "national" in the name or
"N.A." after the name) Federal Deposit Insurance
Corporation
Compliance and Consumer Affairs
550 17th
Street, NW
Washington, DC 20429
(202) 942-3100 or 1 (877)
275-3342
(regulates state-chartered banks that are not members of
the Federal Reserve System) Office of Thrift
Supervision
Consumer Programs
1700 G Street,
NW
Washington, DC 20552
(202) 906-6237 or 1 (800)
842-6929
(regulates federal savings and loan associations and
federal savings banks) National Credit Union
Administration
Office of Public and Congressional
Affairs
1775 Duke Street
Alexandria, VA 22314-3428
(703)
518-6330
(regulates federally chartered credit unions) Federal Trade
Commission
Consumer Response Center
6th and Pennsylvania,
NW
Washington, DC 20580
877-FTC-HELP - toll free
(877-382-4357)
(regulates finance companies, stores, auto
dealers, mortgage companies, and credit bureaus) Survey of Credit Card Plans Every six months the Federal Reserve System surveys the terms of
credit card plans offered by financial institutions and publishes a
report of the findings. The report includes information from the
largest credit card issuers in the country as well as other
financial institutions that wish to participate in the survey. The
credit terms shown in the accompanying list are as of January 31,
2004, and are subject to change. You should contact issuers for
current rates and to learn about other credit card plans. Codes Used in the List of Plans Availability
Refers to
availability of card to consumers
N = Nationally
R = Only in
selected states
State abbreviation = Only in state specified Type of pricing
F =
Fixed
V = Variable
T = Tiered, with different periodic rates
for different levels of outstanding balance. 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
list of plans 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 to
card issuer
8 = Federal Reserve discount rate
9 = Other
0 =
Not applicable
Other features
Credit card
issuers may add enhancements or other features to the plan without
charging extra fees. These enhancements may include cash rebates,
purchase protections, warranty guarantees, travel accident or
automobile rental insurance, discounts on goods and services, and
incentives for use such as frequent flyer miles.
1 = Rebates on
purchases
2 = Extension of manufacturer's warranty
3 =
Purchase protection/security
4 = Travel accident insurance
5 =
Travel-related discounts
6 = Automobile rental insurance
7 =
Non-travel-related goods and services
8 = Credit card
registration
9 = Reduced introductory interest rate
available
10 = Other, not specified
N.R. = Not reported
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