SHOP - The Card You Pick Can Save You Money

Text-only Preview

OFFICIAL BUSINESS
W
F
B
EDERAL
A
OARD
SHINGTON

OF
R
G
ESER
, DC 20551-0001
OVERNORS
VE
S
YSTEM

OF

THE
The Card You Pick
Can Save You Money

12
1
Introduction
Comptroller of the Currency
Smart consumers comparison shop for credit, whether they're looking
Office of the Ombudsman
for a mortgage, an auto loan, or a credit card. Comparison shopping is
Customer Assistance Unit
important because it could save you money.
1301 McKinney Street, Suite 3710
Houston, TX 77010
When you're looking for a credit card, be sure to consider the costs and
1 (800) 613-6743
terms. They can make a difference in how much you pay for the
(regulates banks with "national" in the name or "N.A." after the name)
privilege of borrowing. Compare them with the costs and terms of the
Federal Deposit Insurance Corporation
cards you already have to find the plan that best fits your spending and
Compliance and Consumer Affairs
repayment habits.
550 17th Street, NW
Key costs and terms to consider are the annual percentage rate (APR)
Washington, DC 20429
(202) 942-3100 or 1 (800) 934-3342
for goods and services as well as for cash advances, the annual fee, and
(regulates state-chartered banks that are not members of the Federal
the grace period. Also compare cash-advance fees, late-payment
Reserve System)
charges, and over-the-limit fees.
Office of Thrift Supervision
Besides looking at these costs and terms, think about your typical bill-
Consumer Programs
paying behavior. Do you pay your outstanding balance in full each
1700 G Street, NW
month? Or do you usually carry over a balance? Matching the credit
Washington, DC 20552
card plan to your needs could save money.
(202) 906-6237 or 1 (800) 842-6929
(regulates federal savings and loan associations and federal savings
banks
)
Credit Card Interest Rates
National Credit Union Administration
Credit card issuers offer variable-rate, fixed-rate, and tiered-rate plans.
Office of Public and Congressional Affairs
For variable-rate credit card plans, the interest rate is calculated accord-
1775 Duke Street
ing to a formula. Three of the most commonly used formulas are
Alexandria, VA 22314-3428
(703) 518-6330
Index + Margin = Variable rate
(regulates federally chartered credit unions)
Index x Multiple = Variable rate
Federal Trade Commission
(Index + Margin) x Multiple = Variable rate
Consumer Response Center
6th and Pennsylvania, NW
The most common indexes used by credit card issuers are the prime
Washington, DC 20580
rate; the one-, three- and six-month Treasury bill rates; the federal funds
877-FTC-HELP - toll free (877-382-4357)
rate; and the Federal Reserve discount rate. Most of the indexes are
(regulates finance companies, stores, auto dealers, mortgage companies,
and credit bureaus
)
published in the money or business section of major newspapers. If the index
rate used for your credit card changes, the rate on your card will, too.
To obtain additional copies of this brochure contact Publications Services, Board of
Governors of the Federal Reserve System, Mail Stop 127, Washington, DC 20551.
FRB1-2000-501

2
11
The margin is a number of percentage points chosen by the credit card
card issuers may also impose a penalty rate if you have more than one
issuer. The card issuer also chooses the multiple.
late payment within several months.
The interest rate on a fixed-rate credit card plan, though not explicitly
Over-the-limit fee
tied to changes in another interest rate, also can change over time. The
A fee imposed when your charges exceed the credit limit set on your
card issuer must notify you before the "fixed" interest rate is changed.
card.
A tiered interest rate means that different rates apply to different levels
Penalty rate
of the outstanding balance (for example, 16% on balances of $1–$500;
The rate that applies under specific circumstances set out by the card
17% on balances above $500).
issuer. For example, if you make 2 late payments within 6 months, a
card issuer may have a policy of raising the interest rate.
Some card issuers may have a policy that raises your interest rate if you
make late payments. For example, if you make 2 late payments within 6
Periodic rate
months, the card issuer may raise your interest rate from 18% APR to
The rate you are charged each billing period. For most credit card
24% APR. If such a penalty rate applies to your card, the issuer must
plans, the periodic rate is a monthly rate, calculated by dividing the APR
include a notice in the solicitation materials.
by 12. For example, a credit card with an 18% APR has a monthly
periodic rate of 1.5%.
Card issuers may also charge different rates for different types of
transactions. For example, the card may carry one rate for purchases of
For more information:
goods and services, another rate for cash advances, and still another
rate for balance transfers.
You can find listings of credit card plans, rates, and terms on the
Internet, in personal finance magazines, and in newspapers.
How Much Will You Pay?
The following federal agencies are responsible for enforcing the federal
The finance charge--that is, the dollar amount you will pay to use
Truth in Lending Act, the law that governs disclosure of terms for credit
credit--depends on your outstanding balance and the periodic rate in
cards. Questions concerning compliance by a particular financial
your credit card plan:
institution or credit card issuer should be directed to the institution's
regulatory agency.
Finance charge = Outstanding balance x Periodic rate
Federal Reserve Board
Division of Consumer and Community Affairs
What Is the Outstanding Balance?
Mail Stop 801
Washington, DC 20551
The outstanding balance can be calculated in several ways, and the
(202) 452-3693
method of calculation can make a big difference in the finance charge
(regulates state banks that are members of the Federal Reserve System)
you will pay:
• Average daily balance method including new purchases. The balance
is the sum of the outstanding balances for every day in the billing

10
3
example, one APR for purchases, another for cash advances, and still
cycle (including new purchases and deducting payments and credits)
another for balance transfers. Some plans may increase the APR if a
divided by the number of days in the billing cycle.
payment is late.
• Average daily balance method excluding new purchases. The balance
Cash-advance fee
is the sum of the outstanding balances for every day in the billing
A fee charged if you obtain a cash advance. This fee is in addition to
cycle (excluding new purchases and deducting payments and credits)
the interest rate charged on the amount of the advance.
divided by the number of days in the billing cycle.
Finance charge
• Two-cycle average daily balance method including new purchases.
The dollar amount you pay to use credit. Besides interest costs, the
The balance is the sum of the average daily balances for two con-
finance charge may include other charges such as cash-advance fees.
secutive billing cycles. One daily balance, that for the current billing
cycle, is calculated by summing the outstanding balances for every
Grace period
day in the billing cycle (including new purchases and deducting
A period of time, often about 25 days, during which you can pay your
payments and credits) and dividing that total by the number of days
credit card bill without incurring a finance charge. Under nearly all
in the billing cycle. The other daily balance is that from the preceding
credit card plans, the grace period applies only if you pay your balance
billing cycle.
in full each month. It does not apply if you carry a balance forward.
Also, the grace period usually does not apply to cash advances, which
• Two-cycle average daily balance method excluding new purchases.
may begin accruing interest from the day of the transaction.
The balance is the sum of the average daily balances for two con-
secutive billing cycles. One daily balance, that for the current billing
Interest rate
cycle, is calculated by summing the outstanding balances for every
A measure of the cost of credit, expressed as a percent. For variable-
day in the billing cycle (excluding new purchases and deducting
rate credit card plans, the interest rate is explicitly tied to another
payments and credits) and dividing that total by the number of days
interest rate, such as the prime rate or the Treasury bill rate. If the other
in the billing cycle. The other daily balance is that from the preceding
rate changes, the rate on you card will, too. The interest rate on fixed-
billing cycle.
rate credit card plans, though not explicitly tied to changes in other
interest rates, can also change over time. The card issuer must notify
• Adjusted balance method. The balance is the outstanding balance at
you before the "fixed" interest rate is changed. A tiered interest rate
the beginning of the billing cycle minus payments and credits made
means that different rates apply to different levels of the outstanding
during the billing cycle.
balance (for example, 16% on balances of $1–$500; 17% on balances
• Previous balance method. The balance is the outstanding balance at
above $500).
the beginning of the billing cycle.
Late-payment charge
Depending on the balance you carry and the timing of your purchases
A charge imposed when your payment is late. If your payment arrives
and payments, the average daily balance method excluding new
after the grace period, you may be charged both a finance charge (the
purchases, the adjusted balance method, and the previous balance
interest on your outstanding balance) and a late-payment charge. Some
method tend to result in lower finance charges than the other balance-
calculation methods.

4
9
What Is the Periodic Rate?
Interest rate pricing
The periodic rate is the rate you are charged each billing period.
Is the interest rate fixed? Variable? Tiered? If the rate is variable, what is
Usually the periodic rate is the monthly interest rate, calculated by
the index? The margin? The multiple?
dividing the card's APR by 12. If your card has different rates for
different types of transactions, then different periodic rates will apply to
APR
What is the APR for purchases? For cash advances? For balance trans-
those balances. For example, if your card has a 12% APR on purchases,
fers? Is there a penalty rate if you make late payments?
the periodic rate for purchases is 1%; and if your card has a 24% APR
on cash advances, the periodic rate for cash advances is 2%.
Finance charge
The Right Card for You
What method for determining the outstanding balance is used to
calculate the finance charge?
While the outstanding balance and the periodic rate are important
factors in choosing a credit card, they shouldn’t be your only consider-
Annual fee
ations. Other plan features may be more important to you, depending
What is the annual fee, if any?
on how you use the card. For example, if you don’t always pay your
monthly bill in full, you’ll probably be more interested in a card that
Grace period
carries a lower APR. On the other hand, if you always pay your monthly
What is the grace period for purchases? (Grace periods usually do not
bill in full and card enhancements such as frequent flyer miles don’t
apply to cash advances, which begin accruing interest from the day of
interest you, your best choice may be a card that has no annual fee and
the transaction.)
offers a longer grace period.
Other features
The grace period is the number days between the statement date and
Does the plan offer enhancements that are attractive to you, such as
the due date during which you can pay your bill without incurring a
cash rebates, purchase protections, warranties or guarantees, travel
finance charge. The card issuer may refer to the beginning or ending
accident or automobile rental insurance, discounts on goods and
point of the grace period and tell you about any conditions that apply.
services purchased, and incentives for use, such as frequent flyer miles?
For example, the issuer may say you have "25 days from the statement
Are these features available at no extra cost?
date, provided you have paid your previous balance in full by the due
date." Keep in mind that the statement date is not the date on which
Cracking the Credit Code
you receive the bill; it is the date on which the issuer prepares the
Glossary of Credit Terms
statement, which may be a week or two before you actually receive the
bill in the mail.
Annual fee
A flat, yearly charge similar to a membership fee
Annual percentage rate (APR)
A measure of the cost of credit expressed as a yearly rate. Many credit
card plans charge different APRs for credit used in different ways--for

8
5
8 Transaction fee for cash advances
How Much Could You Save?
Any charge imposed when you use the card for a cash advance. If the
The following example illustrates the annual savings you could achieve
card charges transaction fees for purchases, these fees will also be
by switching to a credit card plan with a lower APR and no annual fee.
stated here.
The average monthly balance used in this simplified example is around
the national average for consumers with credit card debt.
9 Balance-transfer fee
A fee for transferring balances from another card to this card, if any.
Terms
Plan A
Plan B
10 Late-payment fee
The fee imposed if your payment is late, if any.
Average monthly balance
$2,500
$2,500
11 Over-the-credit-limit fee
APR
x 18%
x 14%
The fee imposed if your charges exceed the credit limit set for your
Amount paid in finance
card, if any.
charges annually
$450
$350
Credit Card Shopper's Checklist
Annual fee
+ $20
+ $0
Here are some tips for shopping for a credit card or evaluating the
Total cost
$470
$350
cards you already have.
1. Make a list of features that best fit your needs, and rank them accord-
By switching to a credit card plan with a lower APR and no annual fee,
ing to how you plan to use the card.
you could save $120 annually. Of course, this example assumes that the
interest rate is applied to a constant balance of $2,500 and that you
2. Call the issuers of the cards that seem to match your needs to verify
make all payments on time; if you paid down some of the balance each
the publicized information. Ask if they have any other plans avail-
month, the amount paid in finance charges annually would be less.
able.
Also, if you make a payment late, you may incur additional fees that
will increase your cost.
3. If you are currently a cardholder and have a good credit rating, ask
the issuer of your card to lower your current rate or to reduce or
waive your annual fee. Negotiate.
4. Review the following information about the plans:
Availability
Is the card accepted nationally? Regionally? Only in one state? Only in a
specific store?

6
7
Deciphering the Information in a Credit Card
Solicitation or Application

1 APR for purchases
Certain key pieces of information must be included in all solicitations or
The interest rate you will pay, on an annual basis, if you carry over
applications for credit cards. Look for a box similar to the one below for
balances on purchases from one billing cycle to the next. If the card has
information about interest rates, fees, and other terms for the card you
a temporary introductory rate, the rate that applies after the temporary
are considering.
rate expires is also stated.
2 Other APRs
Annual percentage rate
2.9% until 11/1/00
The interest rates you will pay, on an annual basis, if you get a cash
1
(APR) for purchases
after that, 14.9%
advance on your credit card, if you transfer a balance from another
credit card, or if the card issuer applies penalty rates. (More information
2 Other APRs
Cash-advance APR: 15.9%
on the penalty rate may be included outside the disclosure box--for
Balance-transfer APR: 15.9%
example, in a footnote.)
Penalty rate: 23.9% See explanation below.*
3 Variable-rate information
If the card has a variable rate instead of a fixed rate, this section will tell
3 Variable-rate information
Your APR for purchase transactions may
you how the variable rate is determined. (More information may be
vary. The rate is determined monthly by
adding 5.9% to the Prime Rate**
included outside the disclosure box--for example, in a footnote.)
4
Grace period for repayment
25 days on average
Grace period for repayment of balances for purchases
4 of balances for purchases
The number of days you have to pay your bill in full without triggering
any finance charges. With most plans, the grace period applies only to
Method of computing the
Average daily balance
5
purchases; cash advances and balance transfers may start accruing
balance for purchases
(excluding new purchases)
interest immediately.
6 Annual fees
None
5 Method of computing the balance for purchases
7 Minimum finance charge
$.50
The method that will be used to calculate your outstanding balance if
you carry over a balance and will pay a finance charge.
8 Transaction fee for cash advances: 3% of the amount advanced
6 Annual fees
9 Balance-transfer fee: 3% of the amount transferred
The annual fee (or other periodic fee) the issuer charges for you to
10
have the card. You may have to pay this fee even if you never use the
Late-payment fee: $25
card.
11 Over-the-credit-limit fee: $25
7
*Explanation of penalty. If your payment arrives more than ten days late two times
Minimum finance charge
within a six-month period, the penalty rate will apply.
Any minimum or fixed finance charge that could be imposed during a
billing cycle. A minimum finance charge usually applies only when a
**The Prime Rate used to determine your APR is the rate published in the Wall Street
finance charge is imposed, that is, when you carry over a balance.
Journal on the 10th day of the prior month.

6
7
Deciphering the Information in a Credit Card
Solicitation or Application

1 APR for purchases
Certain key pieces of information must be included in all solicitations or
The interest rate you will pay, on an annual basis, if you carry over
applications for credit cards. Look for a box similar to the one below for
balances on purchases from one billing cycle to the next. If the card has
information about interest rates, fees, and other terms for the card you
a temporary introductory rate, the rate that applies after the temporary
are considering.
rate expires is also stated.
2 Other APRs
Annual percentage rate
2.9% until 11/1/00
The interest rates you will pay, on an annual basis, if you get a cash
1
(APR) for purchases
after that, 14.9%
advance on your credit card, if you transfer a balance from another
credit card, or if the card issuer applies penalty rates. (More information
2 Other APRs
Cash-advance APR: 15.9%
on the penalty rate may be included outside the disclosure box--for
Balance-transfer APR: 15.9%
example, in a footnote.)
Penalty rate: 23.9% See explanation below.*
3 Variable-rate information
If the card has a variable rate instead of a fixed rate, this section will tell
3 Variable-rate information
Your APR for purchase transactions may
you how the variable rate is determined. (More information may be
vary. The rate is determined monthly by
adding 5.9% to the Prime Rate**
included outside the disclosure box--for example, in a footnote.)
4
Grace period for repayment
25 days on average
Grace period for repayment of balances for purchases
4 of balances for purchases
The number of days you have to pay your bill in full without triggering
any finance charges. With most plans, the grace period applies only to
Method of computing the
Average daily balance
5
purchases; cash advances and balance transfers may start accruing
balance for purchases
(excluding new purchases)
interest immediately.
6 Annual fees
None
5 Method of computing the balance for purchases
7 Minimum finance charge
$.50
The method that will be used to calculate your outstanding balance if
you carry over a balance and will pay a finance charge.
8 Transaction fee for cash advances: 3% of the amount advanced
6 Annual fees
9 Balance-transfer fee: 3% of the amount transferred
The annual fee (or other periodic fee) the issuer charges for you to
10
have the card. You may have to pay this fee even if you never use the
Late-payment fee: $25
card.
11 Over-the-credit-limit fee: $25
7
*Explanation of penalty. If your payment arrives more than ten days late two times
Minimum finance charge
within a six-month period, the penalty rate will apply.
Any minimum or fixed finance charge that could be imposed during a
billing cycle. A minimum finance charge usually applies only when a
**The Prime Rate used to determine your APR is the rate published in the Wall Street
finance charge is imposed, that is, when you carry over a balance.
Journal on the 10th day of the prior month.

8
5
8 Transaction fee for cash advances
How Much Could You Save?
Any charge imposed when you use the card for a cash advance. If the
The following example illustrates the annual savings you could achieve
card charges transaction fees for purchases, these fees will also be
by switching to a credit card plan with a lower APR and no annual fee.
stated here.
The average monthly balance used in this simplified example is around
the national average for consumers with credit card debt.
9 Balance-transfer fee
A fee for transferring balances from another card to this card, if any.
Terms
Plan A
Plan B
10 Late-payment fee
The fee imposed if your payment is late, if any.
Average monthly balance
$2,500
$2,500
11 Over-the-credit-limit fee
APR
x 18%
x 14%
The fee imposed if your charges exceed the credit limit set for your
Amount paid in finance
card, if any.
charges annually
$450
$350
Credit Card Shopper's Checklist
Annual fee
+ $20
+ $0
Here are some tips for shopping for a credit card or evaluating the
Total cost
$470
$350
cards you already have.
1. Make a list of features that best fit your needs, and rank them accord-
By switching to a credit card plan with a lower APR and no annual fee,
ing to how you plan to use the card.
you could save $120 annually. Of course, this example assumes that the
interest rate is applied to a constant balance of $2,500 and that you
2. Call the issuers of the cards that seem to match your needs to verify
make all payments on time; if you paid down some of the balance each
the publicized information. Ask if they have any other plans avail-
month, the amount paid in finance charges annually would be less.
able.
Also, if you make a payment late, you may incur additional fees that
will increase your cost.
3. If you are currently a cardholder and have a good credit rating, ask
the issuer of your card to lower your current rate or to reduce or
waive your annual fee. Negotiate.
4. Review the following information about the plans:
Availability
Is the card accepted nationally? Regionally? Only in one state? Only in a
specific store?

4
9
What Is the Periodic Rate?
Interest rate pricing
The periodic rate is the rate you are charged each billing period.
Is the interest rate fixed? Variable? Tiered? If the rate is variable, what is
Usually the periodic rate is the monthly interest rate, calculated by
the index? The margin? The multiple?
dividing the card's APR by 12. If your card has different rates for
different types of transactions, then different periodic rates will apply to
APR
What is the APR for purchases? For cash advances? For balance trans-
those balances. For example, if your card has a 12% APR on purchases,
fers? Is there a penalty rate if you make late payments?
the periodic rate for purchases is 1%; and if your card has a 24% APR
on cash advances, the periodic rate for cash advances is 2%.
Finance charge
The Right Card for You
What method for determining the outstanding balance is used to
calculate the finance charge?
While the outstanding balance and the periodic rate are important
factors in choosing a credit card, they shouldn’t be your only consider-
Annual fee
ations. Other plan features may be more important to you, depending
What is the annual fee, if any?
on how you use the card. For example, if you don’t always pay your
monthly bill in full, you’ll probably be more interested in a card that
Grace period
carries a lower APR. On the other hand, if you always pay your monthly
What is the grace period for purchases? (Grace periods usually do not
bill in full and card enhancements such as frequent flyer miles don’t
apply to cash advances, which begin accruing interest from the day of
interest you, your best choice may be a card that has no annual fee and
the transaction.)
offers a longer grace period.
Other features
The grace period is the number days between the statement date and
Does the plan offer enhancements that are attractive to you, such as
the due date during which you can pay your bill without incurring a
cash rebates, purchase protections, warranties or guarantees, travel
finance charge. The card issuer may refer to the beginning or ending
accident or automobile rental insurance, discounts on goods and
point of the grace period and tell you about any conditions that apply.
services purchased, and incentives for use, such as frequent flyer miles?
For example, the issuer may say you have "25 days from the statement
Are these features available at no extra cost?
date, provided you have paid your previous balance in full by the due
date." Keep in mind that the statement date is not the date on which
Cracking the Credit Code
you receive the bill; it is the date on which the issuer prepares the
Glossary of Credit Terms
statement, which may be a week or two before you actually receive the
bill in the mail.
Annual fee
A flat, yearly charge similar to a membership fee
Annual percentage rate (APR)
A measure of the cost of credit expressed as a yearly rate. Many credit
card plans charge different APRs for credit used in different ways--for