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The Credit Card Deal is in the Disclosures

By Deidre Shirley

A credit card lets you buy things and pay for them later. Using a credit card is a form of borrowing; contrary to what you may think, you have to pay the money back to the credit card issuer.

When choosing a credit card, there are many features — and several kinds of cards — to consider: Fees, charges, interest rates, and benefits/rewards can vary greatly 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 "hidden" fees could affect your available credit or payments.

The Credit Card Terms
Important terms of use generally must be disclosed in any credit card application and even in solicitations (like postcards) that don’t require an application. Here are the most important terms to understand — or ask about — when you are choosing credit offers:

The 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 by even a dollar.

Hidden Fees.
Many credit cards charge membership and/or participation fees monthly or more usually annually. 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 to spend.

The Annual Percentage Rate.
The APR is a measure of the cost of credit, expressed as a yearly rate as a percentage. It must be disclosed before your account can be activated, and it must appear on your account statements somewhere. 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 percentage for each billing cycle. Some credit card plans let the issuer change the APR when interest rates or other economic indicators — called indexes — increase or decrease.

Because the rate change is linked to the index’s performance, these plans are called “variable rate” programs and can cause you a headache. Rate changes 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 (note that it can spike out of control). Before your account is activated, you also must be given information about any limits on how much your rate may change and in what time period, and how often, usually rates can only vary up to 10%.

Say "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 the balance is due. Knowing whether a card gives you a grace period is important if you plan to pay your account in full each month so that you don't get finance charges. 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, whichever suits them.

Default and Universal Default.
Your credit card agreement explains what may happen if you “default” on your account (pay late). 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;” this can hurt you badly.

The 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 is 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, the computation method is still important.

Know 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 created equal, and their terms can be complicated or include a $50 charge. For example, many credit card issuers offer transfers with low introductory rates, but flexible rates later. Some issuers also charge balance transfer fees of up to 5% of the amount of the transfer. If Card Issuer B charges four percent to transfer $7,000.00 from Card Issuer A, your fee would be $400.00. 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 charge you interest in hind sight from the day you did the transfer. 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. So keep in mind that there are so many tricks up their sleeves, you need to know what you are doing and when you are going to be paying.

Know the Balance Computation Methods

Average Daily Balance.
This is the most common calculation method for major cards. 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 (money you spend) 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 your “average daily balance.”

Adjusted Balance.
This usually is the most advantageous method for card companies. 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, so that can be a plus.

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 from their calculations.

Two-cycle or Double-cycle Balances.
Issuers sometimes calculate your balance using your last two month’s account activity and usage. 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. 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, since this can be a tricky way to get out of debt.

How do these methods of calculating affect what I pay?
Let's suppose your monthly interest rate is 1.5 percent, your APR is 18 percent, and your previous balance is $400. On the 1st day of your billing cycle, the card issuer receives and posts your payment of $300. On the 5th day, you make a $50 purchase. Using the:

1. Average Daily Balance method (including new purchases): your finance charge would be $4.05
2. Average Daily Balance method (excluding new purchases): your finance charge would be $3.75
3. Average Daily Balance Double Cycle method (including new purchase and the previous month’s balance): your finance charge would be $6.53
4. Adjusted Balance method: your finance charge would be $1.50.

If you don’t understand how your balance is calculated, ask your card issuer. An explanation also must appear on your billing statements, although the wording is often vague and difficult to understand.

Watch out for 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.

Credit terms vary among issuers - greatly.
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 may not even matter. 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. That makes considering the APR and balance computation method a good,good, good idea. But if you plan to pay for purchases over time, the APR and the balance computation method definitely are major considerations. You will also want to consider if the credit limit is high enough, how widely the card is accepted (some cards aren't accepted everywhere), and the plan’s services and features. One card that is very striaght-forward with easy terms and great payment calculations is the Pulaski Bank Gold Visa Card. We recommend this card for those who have okay credit and want an easy low maintanence credit card.

Or 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, so you can help out your local high school, college, charity, etc... For example, if you are in one of theafl-cio unions, you can apply for the AFL-CIO union credit card designed for you.

Published: Monday 20th of October 2008 11:39:19 AM

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