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Facts

for Consumers

Choosing

and Using

Credit Cards

Chances are youve 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 its 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 youre 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 indexs

performance, these plans are called variable

rate programs. Rate changes raise or lower

the finance charge on your account. If youre

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 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 youll 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.

January 1999

 FEDERAL TRADE COMMISSION TOLL-FREE 1-877-FTC-HELP

 WWW.FTC.GOV FOR THE CONSUMER
345

Balance Computation Method for the Finance Charge. If you dont have a free period,

or if you expect to pay for purchases over time,

its 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 youll pay  even if the APR and your

buying patterns remain relatively constant. See

page 10 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 arent 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 months 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.

If you dont 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.

Youll probably also want to consider if the

credit limit is high enough, how widely the card

is accepted, and the plans 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 didnt 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 creditors requirements,

or the delay in crediting your account wont

result in a charge.
678

To help avoid finance charges, follow the

issuers 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 its 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.

Errors on Your Bill. Issuers must follow rules

for promptly correcting billing errors. Youll

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 didnt accept, or for

an item that wasnt delivered as agreed. Of

course, you still have to pay any part of the bill

thats 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 cant be held responsible for any unauthorized charges. If a thief uses your card before

you report it missing, the most youll 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. Its 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 dont 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 dont apply, you may want to

consider filing an action in small claims court.

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 plans terms

before you accept the card.

● Pay bills promptly to keep finance and other

charges to a minimum.

● 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 cant 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 youll use.

For Help and 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
9 10

Heres how some 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)

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 Seventeenth 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

Washington, DC 20580

The FTC publishes a series of credit brochures.

For a complete list, write: Best Sellers,

Consumer Response Center, FTC, Washington,

DC 20580, or call: toll-free 1-877-FTC-HELP

(382-4357); TDD: 202-326-2502. You also can

visit the FTC at www.ftc.gov.