Chances are you've gotten your share of
"pre-approved" credit card offers in the mail, some
with low introductory rates and other perks. Many of
these solicitations urge you to accept "before the
offer expires." Before you accept, shop around to
get the best deal.
Credit Card
Terms
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 $25 to
$50, 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.
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Choosing and Using Credit Cards
The next
time you apply for a mortgage or personal loan, you
may be asked if you want to buy credit insurance, or
it might already be included in your loan proposal.
Credit insurance protects the loan on the chance
that you can't make your payments. Credit insurance
usually is optional, which means you don't have to
purchase it from the lender. In fact, the Federal
Trade Commission (FTC), the nation's consumer
protection agency, says it's against the law for a
lender to deceptively include credit insurance (or
other optional products) in your loan without your
knowledge or permission.
There are
four main varieties of credit insurance:
Credit life insurance pays off all or some
of your loan if you die. Credit disability
insurance , also known as accident and
health insurance, makes payments on the loan if you
become ill or injured and can't work.
Involuntary unemployment insurance , also
known as involuntary loss of income, makes your loan
payments if you lose your job due to no fault of
your own, such as a layoff. Credit property
insurance protects personal property used
to secure the loan if destroyed by events like
theft, accident or natural disasters.
Shopping Tips
Before deciding to buy credit insurance from a
lender, think about your needs, your options, and
the rates you're going to pay. You may decide you
don't need credit insurance. If you do, credit
insurance can be an expensive form of insurance. For
example, it may be less expensive and more practical
for you to get life insurance than credit insurance.
Before deciding to buy credit insurance, you should
ask:
- How much is the
premium?
- Will the
premium be financed as part of the loan? If so,
it will increase your loan amount and you'll pay
additional interest, and more for points (if
points are on your loan).
- Can you pay
monthly instead of financing the entire premium
as part of your loan?
- How much lower
would your monthly loan payment be without the
credit insurance?
- Will the
insurance cover the full length of your loan and
the full loan amount?
- What are the
limits and exclusions on payment of benefits -
that is, spell out exactly what's covered and
what's not.
- Is there a
waiting period before the coverage becomes
effective?
- If you have a
co-borrower, what coverage does he or she have
and at what cost?
- Can you cancel
the insurance? If so, what kind of refund is
available?
Before you
sign any loan papers, ask the lender whether the
loan includes any charges for voluntary credit
insurance. If you don't want credit insurance, tell
the lender. If the lender still pressures you to buy
insurance, find another lender. And review your loan
papers carefully to be sure they have been drawn up
correctly. Lenders can't deny you credit if you
don't buy optional credit insurance - and if you
don't buy it directly from them. If a lender tells
you that you'll only get the loan if you buy the
optional credit insurance, report the lender to your
state attorney general, your state insurance
commissioner or the FTC. Consumers should ask these
same questions about other extra products offered
with their loan, such as auto or shopping clubs,
home or auto security plans, and debt cancellation
products.
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Top 10 Hidden Dangers
of Credit Cards
1. The
universal default penalties. Card issuers
regularly check their customers' credit reports for
late payments on any of their bills. Any late
payment can be used as an excuse to trigger a hike
in your credit card's interest rate, even if you
have never made a late payment to the card issuer.
A recent
study by Consumer Action, a San Francisco-based
consumer advocacy group, found that 39 percent of
credit cards had universal default penalties in
2003. This year the figure jumped to 44 percent.
2.
Bait-and-switch card offers. Direct mail offers
generally advertise the issuer's premium card at an
eye-popping low interest rate, while the fine print
says the company can issue a more costly non-premium
card with a higher annual percentage rate if you
fail to qualify for the premium card. Just because
you apply for a card with a low rate doesn't mean
the card that shows up in the mail actually carries
that low rate.
3.
Shrinking grace periods. Historically, grace
periods -- the time during which your transactions
don't accrue interest -- were 30 days long. They now
average 23 days, and some issuers have whittled the
grace period to 20 days. Some cards have no grace
period at all.
4.
Two-cycle billing. While most card issuers use
the standard one-month method to calculate interest
charges, some use a method that calculates interest
on two previous months' balances. Companies compute
interest charges on your average daily balance by
adding each day's balance and then dividing that
total by the number of days in the billing cycle.
Some do it on a monthly basis but others use the
average daily balance over the last two billing
periods. If you carry a balance this usually means
that you've lost any grace period on your new
purchases. Unless you pay off your balance for two
months in a row, the two-cycle method will include
the prior cycle's average balance in calculating
your finance costs even though you paid off that
cycle's balance in full. You don't face that expense
with a single-cycle card.
5.
Inactivity charges. Credit card companies don't
make money if you don't use your cards. Keeping your
card in your wallet could incur a hefty fee, as much
as $15 if you haven't swiped your card in six
months, but charges may be incurred for shorter
intervals.
6. Late
payment fees. A recent study by Vertis, a
marketing company that researches consumer credit
usage and payment habits, found that 2 percent of
all credit card holders occasionally miss getting
their credit card payment in on time. They pay
dearly. The national average is $29. MBNA (one of
the largest issuers of credit cards), Bank of
America and Providian are among the steepest
chargers. Their late-paying customers get squeezed
$39, according to Consumer Action.
And there's
yet another downside to paying late: A higher
interest rate. In a 2003 survey, Consumer Action
found that just one or two late payments will
trigger a higher interest rate.
7.
Over-limit fees. Exceed your credit limit by
even one cent and you'll be hit with over-limit fees
of $25 to $39. And don't forget -- charges such as a
$39 late fee can then trigger a $39 over-limit fee.
8.
Balance transfer fees. It's the big tease: A
rock-bottom introductory rate to transfer your
balance, but that tantalizing low rate may come with
a steep transaction fee, 3 to 5 percent, for
transferring your balance to their card, which means
transferring $1,000 at 4 percent will cost you $40.
"It's really very tricky," says California attorney
Howard Strong, author of "Credit
Card Secrets." He adds, "They have all these
sneaky fees. You need to be extremely cautious."
By the way,
last year, the industry took in $43 billion in fee
income, up from $39 billion in 2002, according to
R.K. Hammer Investment Bankers. The industry's take
is expected to increase again this year.
9.
Mandatory arbitration. "If there's a dispute,
you may have given up your right to your day in a
court of law," says attorney/author Strong. "If
that's the case, your only recourse is mandatory
arbitration."
10.
Payment allocation. If you're carrying a
balance, and you use your credit card for purchases
and cash advances, or you're paying off a
promotional rate and then add charges beyond the
promotional period, your card company will first
allocate your payments to the charges that will earn
it the most money. In most cases, that means it will
apply your payment to the balance that has the lower
rate, thereby allowing the balance with the higher
rate to accumulate and compound interest.
