Common Credit
Card Terminology
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 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 $20 to $55, 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.
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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