April 2005

Choosing and Using Credit Cards

Chances are you’ve gotten your share of

“pre-approved” credit card offers in the mail, 

some with low introductory rates 

and other perks. Many of these 

solicitations urge you to accept 

“before the offer expires.” Before 

you accept, shop around to get the 

best deal.

Credit Card 

Terms

A credit card is a form of borrowing that often involves charges. 

Credit terms and conditions affect your overall cost. 

So it’s wise to compare terms and fees before you 

agree to open a credit or charge card account. The 

following are some important terms to consider that 

generally must be disclosed in credit card applications or in solicitations that require no application. 

You also may want to ask about these terms when 

you’re shopping for a card.

Annual Percentage Rate. The APR is a measure 

of the cost of credit, expressed as a yearly rate. It also 

must be disclosed before you become obligated on 

the account and on your account statements.

The card issuer also must disclose the “periodic 

rate” — the rate applied to your outstanding balance 

to figure the finance charge for each billing period.

Some credit card plans allow the issuer to change 

your APR when interest rates or other economic 

indicators — called indexes — 

change. Because the rate change is 

linked to the index’s performance, 

these plans are called “variable 

rate” programs. Rate changes raise 

or lower the finance charge on 

your account. If you’re considering 

a variable rate card, the issuer must 

also provide various information 

that discloses to you:

 that the rate may change; and

 how the rate is determined — which index is 

used and what additional amount, the “margin,” 

is added to determine your new rate.

At the latest, you also must receive information, 

before you become obligated on the account, about 

any limitations on how much and how often your 

rate may change.

Free Period. Also called a “grace period,” a free 

period lets you avoid finance charges by paying 

your balance in full before the due date. Knowing 

whether a card gives you a free period is especially 

important if you plan to pay your account in full 

each month. Without a free period, the card issuer 

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may impose a finance charge from the date you use 

your card or from the date each transaction is posted 

to your account. If your card includes a free period, 

the issuer must mail your bill at least 14 days before 

the due date so you’ll have enough time to pay.

Annual Fees. Most issuers charge annual membership or participation fees. They often range from $25 

to $50, sometimes up to $100; “gold” or “platinum” 

cards often charge up to $75 and sometimes up to 

several hundred dollars.

Transaction Fees and Other Charges. A card 

may include other costs. Some 

issuers charge a fee if you use 

the card to get a cash advance, 

make a late payment, or 

exceed your credit limit. Some 

charge a monthly fee whether 

or not you use the card.

Balance Computation Method for the Finance 

Charge. If you don’t have a free period, or if you 

expect to pay for purchases over time, it’s important 

to know what method the issuer uses to calculate 

your finance charge. This can make a big difference 

in how much of a finance charge you’ll pay — even 

if the APR and your buying patterns remain relatively constant. See page 4 for examples of how the 

methods can affect your costs.

Examples of balance computation methods 

include the following:

Average Daily Balance. This is the most common 

calculation method. It credits your account from the 

day payment is received by the issuer. To figure the 

balance due, the issuer totals the beginning balance 

for each day in the billing period and subtracts any 

credits made to your account that day. While new 

purchases may or may not be added to the balance, 

depending on your plan, cash advances typically are 

included. The resulting daily balances are added for 

the billing cycle. The total is then divided by the 

number of days in the billing period to get the “average daily balance.”

Adjusted Balance. This is usually the most advantageous method for card holders. Your balance is determined by subtracting payments or credits received 

during the current billing period from the balance at 

the end of the previous billing 

period. Purchases made during the billing period aren’t 

included.

This method gives you 

until the end of the billing 

cycle to pay a portion of your 

balance to avoid the interest charges on that amount. 

Some creditors exclude prior, unpaid finance charges 

from the previous balance.

Previous Balance. This is the amount you owed 

at the end of the previous billing period. Payments, 

credits and new purchases during the current billing 

period are not included. Some creditors also exclude 

unpaid finance charges.

Two-cycle Balances. Issuers sometimes use various methods to calculate your balance that make 

use of your last two month’s account activity. Read 

your agreement carefully to find out if your issuer 

uses this approach and, if so, what specific two-cycle 

method is used.

It’s important to know what 

method the issuer uses to 

calculate your finance charge. 

FTC Facts For Consumers 2
If you don’t understand how your balance is 

calculated, ask your card issuer. An explanation must 

also appear on your billing statements.

Other Costs and Features

Credit terms vary among issuers. When shopping 

for a card, think about how you plan to use it. If 

you expect to pay your bills in full each month, the 

annual fee and other charges may be more important 

than the periodic rate and the APR, if there is a grace 

period for purchases. However, if you use the cash 

advance feature, many cards do not permit a grace 

period for the amounts due — even if they have a 

grace period for purchases. So, it may still be wise 

to consider the APR and balance 

computation method. Also, if you 

plan to pay for purchases over 

time, the APR and the balance 

computation method are definitely 

major considerations.

You’ll probably also want to 

consider if the credit limit is high 

enough, how widely the card is accepted, and the 

plan’s services and features. For example, you may 

be interested in “affinity cards” — all-purpose credit 

cards sponsored by professional organizations, college alumni associations, and some members of the 

travel industry. An affinity card issuer often donates 

a portion of the annual fees or charges to the sponsoring organization or qualifies you for free travel or 

other bonuses.

Special Delinquency Rates. Some cards with low 

rates for on-time payments apply a very high APR if 

you are late a certain number of times in any specified time period. These rates sometimes exceed 20 

percent. Information about delinquency rates should 

be disclosed to you in credit card applications or in 

solicitations that do not require an application.

Receiving a Credit Card

Federal law prohibits issuers from sending you a card 

you didn’t ask for. However, an issuer can send you 

a renewal or substitute card without your request. 

Issuers also may send you an application or a solicitation, or ask you by phone if you want a card — and, 

if you say yes, they may send you one.

Cardholder Protections

Federal law protects your use of credit cards.

Prompt Credit for Payment. 

An issuer must credit your account 

the day payment is received. The 

exceptions are if the payment is 

not made according to the creditor’s requirements, or the delay in 

crediting your account won’t result 

in a charge.

To help avoid finance charges, follow the issuer’s 

mailing instructions. Payments sent to the wrong 

address could delay crediting your account for up to 

five days. If you misplace your payment envelope, 

look for the payment address on your billing statement or call the issuer.

Refunds of Credit Balances. When you make a 

return or pay more than the total balance at present, 

you can keep the credit on your account or write 

your issuer for a refund — if it’s more than a dollar. 

A refund must be issued within seven business days 

of receiving your request. If a credit stays on your 

account for more than six months, the issuer must 

make a good faith effort to send you a refund.

When shopping for a 

card, think about how 

you plan to use it. 

FTC Facts For Consumers 3
Errors on Your Bill. Issuers must follow rules 

for promptly correcting billing errors. You’ll get a 

statement outlining these rules when you open an 

account and at least once a year. In fact, many issuers 

include a summary of these rights on your bills.

If you find a mistake on your bill, you can 

dispute the charge and withhold payment on that 

amount while the charge is being investigated. The 

error might be a charge for the wrong amount, for 

something you didn’t accept, or for an item that 

wasn’t delivered as agreed. Of course, you still have 

to pay any part of the bill that’s not in dispute, including finance and other charges.

If you decide to dispute a charge:

 Write to the creditor at the address indicated on 

your statement for “billing inquiries.” Include 

your name, address, account number, and a 

description of the error.

 Send your letter soon. It must reach the creditor 

within 60 days after the first bill containing the 

error was mailed to you.

The creditor must acknowledge your complaint 

in writing within 30 days of receipt, unless the problem has been resolved. At the latest, the dispute must 

be resolved within two billing cycles, but not more 

than 90 days.

Unauthorized Charges. If your card is used without your permission, you can be held responsible for 

up to $50 per card.

If you report the loss before the card is used, 

you can’t be held responsible for any unauthorized 

charges. If a thief uses your card before you report 

it missing, the most you’ll owe for unauthorized 

charges is $50.

To minimize your liability, report the loss as 

soon as possible. Some issuers have 24-hour toll-free 

telephone numbers to accept emergency information. It’s a good idea to follow-up with a letter to the 

issuer — include your account number, the date you 

noticed your card missing, and the date you reported 

the loss.

Disputes about Merchandise or Services. You 

can dispute charges for unsatisfactory goods or services. To do so, you must:

 have made the purchase in your home state or 

within 100 miles of your current billing address. 

The charge must be for more than $50. (These 

limitations don’t apply if the seller also is the 

card issuer or if a special business relationship exists between the seller and the card issuer.) and,

 first make a good faith effort to resolve the 

dispute with the seller. No special procedures are 

required to do so.

If these conditions don’t apply, you may want to 

consider filing an action in small claims court.

FTC Facts For Consumers 4
Shopping Tips

Keep these tips in mind when looking for a credit or 

charge card.

 Shop around for the plan that best fits your 

needs.

 Make sure you understand a plan’s terms before 

you accept the card.

 Hold on to receipts to reconcile charges when 

your bill arrives.

 Protect your cards and account numbers to 

prevent unauthorized use. Draw a line through 

blank spaces on charge slips so the amount can’t 

be changed. Tear up carbons.

 Keep a record — in a safe place separate from 

your cards — of your account numbers, expiration dates and the phone numbers of each issuer 

to report a loss quickly.

 Carry only the cards you think you’ll use.

For More Information

Questions about a particular issuer should be sent to 

the agency with jurisdiction.

National Banks

Comptroller of the Currency

Compliance Management, Mail Stop 7-5

Washington, DC 20219

State Member Banks of the Reserve System

Consumer and Community Affairs

Federal Reserve Board

20th & C Streets, NW

Washington, DC 20551

Federal Credit Unions

National Credit Union Administration

1776 G Street, NW

Washington, DC 20456

Non-Member Federally Insured Banks

Office of Consumer Programs

Federal Deposit Insurance Corporation

550 17th Street, NW

Washington, DC 20429

Federally Insured Savings and Loans,

and Federally Chartered State Banks

Consumer Affairs Program

Office of Thrift Supervision

1700 G Street, NW

Washington, DC 20552

Other Credit Card Issuers

(includes retail/gasoline companies)

Consumer Response Center

Federal Trade Commission

600 Pennsylvania Avenue, NW

Washington, DC 20580

The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the 

marketplace and to provide information to help 

consumers spot, stop, and avoid them. To file a 

complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP 

(1-877-382-4357); TTY: 1-866-653-4261. The FTC 

enters Internet, telemarketing, identity theft, and 

other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds 

of civil and criminal law enforcement agencies in the 

U.S. and abroad.

FTC Facts For Consumers 5
Here’s how some different methods of calculating finance charges affect the cost of credit:

 Average Daily Balance Average Daily Balance

(including new purchases) (excluding new purchases)

Monthly rate 11⁄2% 11⁄2%

APR 18% 18%

PreviousBalance $400 $400

New Purchases $50 on 18th day $50 on 18th day

Payments $300 on 15th day $300 on 15th day

(new balance=$100) (new balance=$100)

Average Daily Balance $270* $250**

Finance Charge $4.05 $3.75

(11⁄2% x $270) (11⁄2% 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 11⁄2% 11⁄2%

APR 18% 18%

Previous Balance $400 $400

Payments $300 $300

Average Daily Balance N/A N/A

Finance Charge $1.50 $6.00

(11⁄2% x $100) (11⁄2% x $400)

For The Consumer Federal Trade Commission

www.ftc.gov 1-877-ftc-help

Federal Trade Commission

Bureau of Consumer Protection

Office of Consumer and Business Education

FTC Facts For Consumers 6