Here's what
you should know before you apply... Before
you apply for a credit card, make sure you understand the terms and disclosures
associated with the offer. Here are some important terms to consider that must
be included in all credit card applications or in solicitations for credit cards. Annual
Percentage Rate (APR): The APR is a measure of the cost of credit, expressed
as a yearly rate. It must be disclosed before you become obligated to a credit
account. There are 2 types of APR plans: 1.)
"Variable Rate" plans allow credit card issuers to change your
APR when interest rates or other economic indicators -- called indexes, change.
They are normally based on the PRIME RATE, the Federal Reserve Discount Rate,
or the Treasury Bill Rate. 2.) "Fixed
Rate" plans are not subject to adjustments like variable rates. They
remain at the disclosed level indicated upon opening the account. But be aware:
the card issuers reserve the right to change your rate at any time. As long as
you're given at least 15 days notice, your "fixed" rate could change. Grace
Period: A grace period is an "interest-free" period in which the
credit card company will waive interest charges. Knowing whether a card gives
you a grace period is especially important if you plan on paying your balance
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.
Luckily, most credit cards offer a 20-25 day grace period. Annual
Fee: Many issuers charge annual membership or participation fees. They range
from $25 to $50-- or over $100 for "gold" or "platinum" cards. Transaction
Fees and Other Charges: A credit 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 you use the credit
card or not. Balance Computation Method:
If you don’t have a grace 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. 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. 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. 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. 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. | If you don’t
understand how your balance is calculated, ask your card issuer. An explanation
must also appear on your billing statements.
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