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Choosing and using Credit Cards
Facts for Consumers from the Federal Trade Commission
Choosing and Using Credit Cards -- February 1993
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.)
The following are examples of how different methods of
calculating finance charges affect the cost of credit:
Average Daily Average Daily
Balance Balance
(including new (excluding new
purchases) purchases)
Monthly rate 1 1/2% 1 1/2%
APR 18% 18%
Previous
Balance $400 $400
New $50 $50
Purchases on 18th day on 18th day
Payments $300 $300
on 15th day on 15th day
(new balance = $100) (new balance = $100)
Average
Daily Balance $270 * $250 **
Finance $4.05 $3.75
Charge (1 1/2% x $270) (1 1/2% x $250)
* To figure average daily balance (including new purchases):
($400 x 15 days) + ($100 x 3 days) + ($150 x 12 days)
30 days = $270
** To figure average daily balance (excluding new purchases):
($400 x 15 days) + ($100 x 15 days)
30 days = $250
Adjusted Balance Previous Balance
Monthly rate 1 1/2% 1 1/2%
APR 18% 18%
Previous
Balance $400 $400
Payments $300 $300
Average
Daily Balance N/A N/A
Finance $1.50 $6.00
Charge (1 1/2% x $100) (1 1/2% x $400)
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
l Shop around for credit card terms that are best for you.
l 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.
l Pay bills promptly to keep finance charges as low as
possible.
l Keep copies of sales slips and promptly compare charges when
your bills arrive.
l 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.
l 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
12/88; 11/91
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