SHOP. Smart consumers do comparison shopping when looking for credit such as a mortgage or an auto loan. It is also a good practice to engage in when shopping for a credit card plan, because the choices you make could save you money.
SHOP among the various plans of credit card issuers contained in this brochure. Compare them with cards you already have and with offers you receive in the mail for the terms that best suit your spending and repayment habits. The costs and terms of the plan or plans can make a difference to how much you pay for the privilege of borrowing.
In the disclosure form from the credit car issuer, key credit terms to consider are the annual percentage rate (APR), annual fee, and grace period. Also consider credit terms such as cash advance fees, late payment charges, and over-the-limit fees.
Take these items into consideration along with how you pay your bills each month, whether in full or only partially. You could save yourself some money.
Definition Of Terms
ANNUAL FEE A flat, yearly charge similar to a membership fee.
ANNUAL A measure of the cost of credit that
PERCENTAGE expresses the finance charge, which includes
RATE (APR) interest and may also include other charges, as a yearly rate.
FINANCE CHARGE The dollar amount you pay to use credit. Besides interest costs, it may include other charges associated with transactions such as cash advance fees.
GRACE PERIOD A time, about 25 days, during which you can pay your credit card bill without paying a finance charge. Under almost all credit card plans, the grace period only applies if you pay your balance in full each month. It does not apply if you carry a balance forward. Also, the grace period does not apply to cash advances.
INTEREST RATE Interest rates on credit card plans change over time. Some are explicitly tied to changes in other interest rates such as the prime rate or the Treasury Bill rate and are called variable rate plans. Others are not explicitly tied to changes in other interest rates and are called fixed rate plans.
Calculation of Finance Charge
It is helpful to know how the credit card issuer will calculate the finance charge on your credit card bill. To determine the finance charge, an issuer will apply a periodic rate to a balance. Card issuers use different balance calculation methods such as: the average daily balance method, the previous balance method, and the adjusted balance method.
With the average daily balance method (the most common method), the issuer calculates the balance by taking the amount of debt you had in your account each day during the period covered by the billing statement and averages it. With the previous balance method, the issuer uses the balance outstanding at the end of the previous period--that is, the period prior to the one covered by the billing statement. With the adjusted balance method, the balance is derived by subtracting the payments you've made from the previous balance.
Combinations to Consider
Smart consumers find the best deal for their budgets and repayment style. For example, if you always pay your monthly bill(s) in full, the best type of card is one that has no annual fee and offers a grace period for paying your bill without paying a finance charge.
No annual fee + grace period = best deal
If you don't always pay off the credit card balance monthly, be sure to look at the periodic rate that will be used to calculate the finance charge.
Credit card issuers that offer variable interest rate plans derive the rate to be charged to the consumer by using a formula.
Two of the most common formulas are:
+ Margin Index or
= Variable rate
Some of the more common indexes used by credit card issuers are the prime rate, the one-, three-, or six-month Treasury Bill rate, the federal funds or Federal Reserve discount rate. Most of these indexes can be found in the money or business section of major newspapers. Once the interest rate corresponding to the index has been identified, the issuer then adds a number of percentage points, the "margin," to this index rate to calculate the rate charged.
In some cases, the issuer might elect to use another formula to determine the rate to be charged to the consumer. The issuers multiply the index or index plus the margin by another number, "the multiple," to calculate the rate charged.
The following is an example of the annual savings you could achieve by switching to a credit card plan with a lower interest rate and no annual fee.
ASSUMPTION In this example, the average monthly balance carried forward equals $2,500, which is about the national average for consumers with credit card debt.
Terms Plan A Plan B
Average monthly balance $2,500 $2,500
APR x .18 x .14
Amount paid in finance charges
annually $450 $350
Annual fee + $ 20 + $ 0
Total cost $470 $350
In this example, the total possible savings each year achieved by selecting a credit card plan with a lower interest rate and not annual fee is ($470 - $350) $120.
Credit Card Owner's Checklist
If you are applying for your first credit card or have several cards already, here are some helpful tips you might want to follow in shopping for a credit card.
1. Review all of the information about the plans.
2. Draft a list of desired features that best fit your needs and rank them according to how you plan to use the card.
3. Call the institutions you've selected to verify the information and to see if they have any other plans available.
4. If you are a current card holder and have a good credit rating, see if the institution that your card will lower you current rate...NEGOTIATE. [Graphic Omitted]
Every six months the Federal Reserve System collects and published a report on the terms of credit card plans offered by financial institutions. This report includes information supplied by the largest card issuers in the country, as well as any other financial institutions that indicate to the Federal Reserve System that they would like to participate in the report and submit information about their credit card plans. The credit terms listed in this report are as of the date indicated below and are subject to change. Consequently, readers are encouraged to contact the credit card issuer for current rates and to learn about their other credit card plans.
Codes Used In The Credit Card Plan List:
Availability Refers to availability of card to consumers
N = national
R = only in selected states
State abbreviation = only in state specified
Type of F = fixed
Pricing V = variable
T = tiered pricing, with different periodic rates applying to different levels of the outstanding balance. The rate shown applies to the lowest of the balance tiers. 8
Grace Period Indicates that no finance charge will be imposed for credit extended on purchase if payment in full is received by the payment due date after the end of the billing period in which the purchase was made. Generally, a grace period allows customers to avoid finance charges on purchases if they always pay their credit card bill in full by the due date of the bill. Grace periods usually do not apply to cash advances, which begin accruing interest from the day of transaction.
Other Features Credit card issuers may automatically add enhancements or other features in the plan without charging extra fees. Enhancements can include cash rebates, purchase protections, warranty guarantees, travel accident or automobile rental insurance, discounts on goods and services purchased, and usage incentives such as frequent flyer miles.
1 = rebates on purchases
2 = extension of manufacturer's warranty
3 = purchase protection/security
4 = travel accident insurance
5 = travel related discounts
6 = automobile rental insurance
7 = non-travel related goods or services
8 = credit card registration
9 = other
N.R. = not reported
Date of Survey January 31, 1995
The list can be obtained from:
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM