Choosing A Credit Card: The Deal is in the Disclosures

A credit card lets you buy things and pay for them over time. Using a credit card is a form of borrowing: you have to pay the money back.

When you are choosing a credit card, there are 

many features – and several 

kinds of cards – to consider: 

Fees, charges, interest rates, 

and benefits can vary among 

credit card issuers. As a 

result, some credit cards that 

look like a great deal at first 

glance may lose their appeal 

once you read the terms and 

conditions of use and calculate how the fees could affect 

your available credit.

Credit Card Terms

Important terms of use generally must be disclosed 

in any credit card application and even in 

solicitations that don’t require an application. Here 

are the most important terms to understand – or ask 

about – when you are choosing among credit offers.

Fees

Many credit cards charge membership and/or 

participation fees. Issuers have a variety of names 

for these fees, including “annual,” “activation,” 

“acceptance,” “participation,” and “monthly 

maintenance” fees. These fees may appear monthly, 

periodically, or as one-time charges, and can range 

from $6 to $150. What’s more, they can have an 

immediate effect on your available 

credit. For example, a card with a 

$250 credit limit and $150 in fees 

leaves you with $100 in available 

credit.

Transaction Fees and Other 

Charges 

Some issuers charge a fee if you 

use the card to get a cash advance 

or make a late payment, or if you 

exceed your credit limit. 

Annual Percentage Rate

The APR is a measure of the cost of credit, expressed 

as a yearly rate. It must be disclosed before your 

account can be activated, and it must appear on your 

account statements.

The card issuer also must disclose the “periodic 

rate.” That’s the rate the issuer applies to your outstanding balance to determine the finance charge for 

each billing period.

Some credit card plans let the issuer change the 

APR when interest rates or other economic indicators – called indexes – change. Because the rate 

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change is linked to the index’s performance and 

varies, these plans are called “variable rate” programs. 

Rate changes also can raise or lower the finance 

charge on your account. If you’re considering a variable rate card, the issuer must tell you that the rate 

may change and how the rate is determined.

Before your account is activated, you also must 

be given information about any limits on how much 

your rate may change – and how often.

Grace Period

A grace period, also called a “free period,” lets you 

avoid finance charges if you pay your balance in 

full before the date it is due. 

Knowing whether a card gives 

you a grace period is important if you plan to pay your 

account in full each month. 

Without a grace 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. 

Balance Computation Method for the Finance 

Charge

If you don’t have a grace period – or if you plan to 

pay for your purchases over time – it’s important to 

know how the issuer calculates your finance charge. 

Which balance computation method is used can 

make a big difference in how much of a finance 

charge you’ll pay – even if the APR and your buying 

patterns stay pretty much the same. 

Balance Transfer Offers

Many credit card companies offer incentives for balance transfers – moving your debt from one credit 

card (Card Issuer A) to another (Card Issuer B). 

All offers are not the same, and their terms can be 

complicated. 

For example, many credit card issuers offer transfers with low introductory rates. Some issuers also 

charge balance transfer fees. If Card Issuer B charges 

four percent to transfer $5,000 from Card Issuer A, 

your fee would be $200. In addition, if you pay late 

or fail to pay off your transferred balance before the 

introductory period ends, Card Issuer B may raise 

the introductory rate and/or charge you interest 

retroactively. And if you use your card from Card 

Issuer B to make new purchases, any payments you 

make will go toward your balance with the lowest interest 

rate – and finance charges at 

the higher interest rate will be 

assessed on the portion of your 

balance that came from new 

purchases. 

Balance Computation 

Methods

Average Daily Balance

This is the most common calculation method. It 

credits your account from the day the issuer receives 

your payment. 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, cash advances typically 

are included. The resulting daily balances are added 

for the billing cycle. Then, the total is divided by the 

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

When choosing a credit 

card, consider fees, charges, 

interest rates, and benefits.

 FTC Facts For Consumers
Adjusted Balance

This usually is the most advantageous method for 

cardholders. The issuer determines your balance 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 period 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 purchases 

made during the current billing period are not 

included. Some creditors exclude unpaid finance 

charges.

Two-cycle or Doublecycle Balances

Issuers sometimes calculate your balance using 

your last two month’s 

account activity. This 

approach eliminates the 

interest-free period if 

you go from paying your 

balance in full each month to paying only a portion each month of what you owe. For example, if 

you have no previous balance, but you fail to pay 

the entire balance of new purchases by the payment 

due date, the issuer will compute the interest on the 

original balance that previously had been subject to 

an interest-free period. Read your agreement to find 

out if your issuer uses this approach and, if so, what 

specific two-cycle method is used.

How do these methods of calculating finance 

charges affect the cost of credit? 

Suppose your monthly interest rate is 1.5 percent, 

your APR is 18 percent, and your previous balance is 

$400. On the 15th day of your billing cycle, the card 

issuer receives and posts your payment of $300. On 

the 18th day, you make a $50 purchase. Using the:

n Average Daily Balance method (including new 

purchases), your finance charge would be $4.05.

n Average Daily Balance method (excluding new 

purchases), your finance charge would be $3.75.

n Adjusted Balance method, your finance charge 

would be $1.50. 

n Average Daily Balance Double-cycle method (including new purchase and the previous month’s 

balance), your finance charge would be $6.53.

If you don’t understand how 

your balance is calculated, ask 

your card issuer. An explanation 

also must appear on your billing 

statements.

Other Costs 

and Features

Credit Terms Vary Among Issuers

When considering a credit 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, and whether there is a grace period for 

purchases. 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. 

It’s important to know how 

the issuer calculates your 

finance charge.

FTC Facts For Consumers 
That makes considering the APR and balance computation method a good idea. But if you plan to pay 

for purchases over time, the APR and the balance 

computation method definitely are major considerations.

You’ll 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, 

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.

Default and Universal Default

Your credit card agreement explains what may happen if you “default” on your account. For example, if 

you are one day late with your payment, your issuer 

may be able to take certain actions, including raising 

the interest rate on your card. Some issuers’ agreements even state that if you are in default on any 

financial account – even one with another company 

– those issuers’ will consider you in default for them 

as well. This is known as “universal default.”

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. This can exceed 

20 percent. Information about delinquency rates 

should be disclosed in credit card applications and in 

solicitations that do not require an application.

For Help & Information

Questions about a particular issuer should be sent to 

the agency with jurisdiction.

Office of the Comptroller of the Currency:

Regulates banks with “national” in the name or 

“N.A.” after the name:

Office of the Ombudsman

Customer Assistance Group

1301 McKinney Street, Suite 3450

Houston, TX 77010

800-613-6743 toll-free

www.occ.treas.gov 

Board of Governors of the Federal Reserve 

System:

Regulates state-chartered banks that are members of 

the Federal Reserve System, bank holding 

companies, and branches of foreign banks:

Federal Reserve Consumer Help

PO Box 1200

Minneapolis, MN 55480

888-851-1920 (TTY: 877-766-8533) toll-free 

ConsumerHelp@FederalReserve.gov 

Federal Deposit Insurance Corporation: 

Regulates state-chartered banks that are not 

members of the Federal Reserve System:

Division of Supervision & Consumer Protection

550 17th Street, NW

Washington, DC 20429

877-ASK-FDIC (275-3342) toll-free

www.fdic.gov 

 FTC Facts For Consumers
National Credit Union Administration: 

Regulates federally chartered credit unions:

Office of Public and Congressional Affairs

1775 Duke Street

Alexandria, VA 22314-3428

703-518-6330

www.ncua.gov 

Office of Thrift Supervision: 

Regulates federal savings and loan associations 

and federal savings banks:

Consumer Programs

1700 G Street, NW

Washington, DC 20552

800-842-6929 toll-free

www.ots.treas.gov 

Federal Trade Commission: 

Regulates non-bank lenders:

Consumer Response Center

600 Pennsylvania Avenue, NW

Washington, DC 20580

877-FTC-HELP (382-4357) toll-free

www.ftc.gov 

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 
The Federal Trade Commission (FTC) is the nation’s consumer protection agency. Here are some tips from 

the FTC to help you be a more savvy consumer.

1. Know who you’re dealing with. Do business only with companies that clearly provide their name, 

street address, and phone number.

2. Protect your personal information. Share credit card or other personal information only when buying from a company you know and trust. 

3. Take your time. Resist the urge to “act now.” Most any offer that’s good today will be good 

tomorrow, too. 

4. Rate the risks. Every potentially high-profit investment is a high-risk investment. That means you 

could lose your investment — all of it. 

5. Read the small print. Get all promises in writing and read all paperwork before making any payments 

or signing any contracts. Pay special attention to the small print. 

6. “Free” means free. Throw out any offer that says you have to pay to get a gift or a “free” gift. If something is free or a gift, you don’t have to pay for it. Period. 

7. Report fraud. If you think you’ve been a victim of fraud, report it. It’s one way to get even with a scam 

artist who cheated you. By reporting your complaint to 1-877-FTC-HELP or ftc.gov, you are providing 

important information to help law enforcement officials track down scam artists and stop them! 

 FTC Facts For Consumers

For The Consumer Federal Trade Commission

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

Federal Trade Commission

Bureau of Consumer Protection

Division of Consumer and Business Education