Choosing A Credit Card
A credit card is a great financial tool. It can be more convenient to use and carry than cash and it offers valuable consumer protections under federal law.
At the same time, its a big responsibility. If you don't use it carefully, you may owe more than you can repay, damage your credit rating, and create credit problems for yourself that can be difficult to undo.
Chances are your mail is full of solicitations from credit card issuers. How do you know if the time is right for a credit card? Here's some important information that may help you determine whether you're ready for plastic, what to look for when you select a company to do business with, and how to use your credit card responsibly.
Qualifying For A Credit Card
If you're at least 18 years old and have a regular source of income, you're well on your way to qualifying for a card. But despite the invitations from card issuers, you'll still have to demonstrate that you're a good risk before they grant you credit. The proof is in your credit record. If you've financed a car loan or other purchase, you probably have a record at a credit reporting bureau. This credit history shows how responsible you've been in paying your bills and helps the credit card issuer decide how much credit to extend.
Before you submit a credit application, get a copy of your report to make sure it's accurate. It's available from the three major credit bureaus:
Information Services, Inc.
P.O. Box 740241
Atlanta, GA 30374-0241
P.O. Box 949
Allen, TX 75013-0949
|Trans Union Corporation |
Trans Union Consumer Relations
760 West Sproul Road
P.O. Box 390
Springfield, PA 19064-0390
Things To Think About Before You Take A Card
- Avoid accepting too many offers. There is rarely a good reason to carry more than one or two credit cards. You should be very selective about choosing cards which are best for you. Having too much credit can lead to bad decisions and unmanageable debt.
- Remember that lenders are looking for people who will run up big balances because those consumers pay the most interest. You may find that credit companies are pursuing you aggressively by mail and phone. You should not view this as a sign that you can afford more credit. The lender may have a marketing profile based on your spending patterns, your credit record, your use of certain services such as home shopping, your magazine subscriptions, or even your zip code, which indicates to them that you are someone who is likely to carry a big credit card balance and pay a good deal of interest.
- Interest rate is important in choosing a card, but not the only consideration. You should always know the interest rate on your cards and should try to keep the rate as low as possible. However, it is rarely a good idea to take a new card solely because of a low rate. The rate only matters if you carry a balance from one month to the next. In addition, the rate can easily change, with or without a reason. Remember that even the best credit card interest rates are high rate credit.
- Beware of temporary "teaser" rates. A teaser rate is an artificially low initial rate which applies only for a limited time. Most teaser rates are good only for six months or less. After that, the rate automatically goes up. Remember that if you build up a balance over the period of a temporary rate, the much higher permanent rate will apply to your repayment plan. This means that the permanent long-term rate on the card is much more important than the temporary rate.
- If your rate is variable, understand the basis on which it may change. Variable interest rates can be very confusing. Some variable rates conceal terms which ensure that your rate will go up steeply over time. Read the credit contract to understand how and when your rate may change.
- Be careful about juggling cards to take advantage of teaser rates and balance transfer options. It takes a great deal of time and effort to juggle cards to take advantage of terms designed to be temporary. Remember that all teaser rate offers are designed to get you locked into the higher rate for the long term, because that is how the lender makes the most money.
- Investigate terms related to late payments charges and penalty rates of interest. Many credit card contracts have provisions in the small print for late charges or to increase your rate of interest if you make even a single late payment. If you are having financial problems, these terms are very important in deciding whether the card makes sense, because late charges and penalty interest rates can get you in further over your head. Even if you are not having financial problems, these terms may become important, because they apply equally to accidental late payments.
- Learn your credit card's billing method. It is important to understand how you will be billed. If interest will apply from the date of your purchase without a grace period, a low rate may actually be higher than it looks. If you intend to pay off the balance in full each month, terms of the grace period are important. You need to understand how the grace period works and remember that many lenders do not mail bills until late in the grace period. A lender must mail your bill at least 14 days before it is due by law. If it takes 7 days to get to you, you would have to pay the bill the same day to be sure it got back to the lender before it was due.
- Always read both the disclosures and the credit contract. You will find disclosures about the terms of a credit card offer, usually in small print on the reverse or at the bottom of the offer. Review these carefully. However, the law does not require that all relevant information be disclosed. For this reason, you must also read your credit contract which comes with the card. This will include terms such as late payment fees, default rates of interest, and a description of the billing method. Since it may take a business or accounting degree to understand some of the terms, you have several choices if you do not understand. You can call the lender for an explanation or refuse credit with too many complex provisions, because those terms are likely to work to your disadvantage.
- If you do take a credit card and discover terms you do not like. You can always cancel any credit card at any time. Although you will be responsible for any balance due at the time of cancellation, you should not keep using a card after you discover that its terms are unfavorable.
Fewer Credit Cards Offer a "Full" Grace Period
A credit card's grace period refers to the number of days before the card company starts charging you interest on new purchases. Many consumers think that with practically every card all their purchases are interest-free for at least 25 days regardless of the previous balance. It's getting harder to find a credit card that offers that kind of free ride on finance charges,.
Some cards still offer a "full" grace period. That would mean 25 days or more of interest-free purchases, even if you're paying interest on an outstanding balance from the previous month. However, with the typical credit card nowadays, if you carry over as little as a penny from the previous month's balance you can expect to be charged interest immediately on new purchases. And, if you have a card with no grace period, you always pay interest on new purchases from the day you make the purchase, even if you pay your bill in full.
The bottom line: Try to understand a card's rules governing the grace period as well as the interest rate and fees. You can do this by reading the literature provided by the card issuer and, if you have questions, calling what's usually a toll-free number for customer assistance. Also, think about how you plan to use a card, especially if you expect to carry a balance most months. Then try to choose and use the card that's best for you.
Kings Of Credit Accounts . . .
Credit grantors generally use three types of credit accounts:
- Revolving Agreement. A consumer pays in full each month or chooses to make a partial payment based on the outstanding balance. Department stores, gas and oil companies, and banks typically issue credit cards based on a revolving plan.
- Charge Agreement. A consumer promises to pay the full balance each month, so the borrower does not have to pay interest charges. Charge cards, not credit cards, and charge accounts with local businesses often require repayment on this basis.
- Installment Agreement. A consumer signs a contract to repay a fixed amount of credit in equal payments over a specific period of time. Automobiles, furniture, and major appliances often are financed this way. Personal loans usually are paid back in installments, too.
Establishing A Credit History . . .
Suppose you haven't financed a car loan, a computer, or some other major purchase. How do you begin to establish credit? First, consider applying for a credit card at a local store and use it responsibly. Ask if they report to a credit bureau. If they do—and if you pay your bills on time—you'll establish a good credit history.
Second, consider a secured credit card. It requires that you open and maintain a bank account or other asset account at a financial institution as security for your line of credit. Your credit line will be a percentage of your deposit, typically from 50 to 100 percent. Application and processing fees are not uncommon for secured credit cards. In addition, secured credit cards usually carry higher interest rates than traditional secured cards.
Third, consider asking someone with an established credit history—perhaps a relative—to co-sign the account if you don't qualify for credit on your own. The co-signer promises to pay your debts if you don't. You'll want to repay any debt promptly so you can build a credit history and apply for credit in the future on your own.
Comparison Shop . . .
Fees, charges, and benefits vary among credit card issuers. When you're choosing a credit card, shop around. Compare these important features:
Key Credit Terms to Consider in the Credit Card Agreement are:
- Annual Fee — a flat, yearly charge similar to a membership fee. Many credit card issuers charge an annual fee for granting you credit, typically $15 to $55. Some issuers charge no annual fee.
- Annual Percentage Rate (APR) — the cost of credit expressed as a yearly rate. The APR is a measure of the cost of credit, expressed as a yearly rate. Check out the "periodic rate," too. That's the rate the issuer applies to your outstanding balance to figure the finance charge for each billing period. For example, if you have an outstanding balance of $2,000, with 18.5% interest and a minimum monthly payment, it would take over 11 years to pay off the debt and cost you an additional $1,934 just for interest, which almost doubles the total cost of your original purchase
- 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.
- Transaction Fees and Other Charges — Some issuers charge a fee if you use the card to get a cash advance, if you fail to make a payment on time, or if you exceed your credit limit. Some may charge a flat fee every month whether you use the card or not.
- Grace Period — A time, usually 25 days, during which you can pay your credit card bill without paying a finance charge. This is the time between the date of a purchase and the date interest starts being charged on that purchase. I f your card has a standard grace period you have an opportunity to avoid finance charges by paying your current balance in full every month. If there is no grace period, the issuer imposes a finance charge from the date you use your card or from the date each transaction is posted to your account.
- Average Daily Balance — A balance calculation method most creditor use in calculating their finance charge. The average daily balance is calculated by adding each days balance and dividing the total by the number of days in the billing cycle.
- Previous Balance Method — With this method of calculating the finance charge, the creditor uses the balance outstanding at the end of the previous billing cycle.
- Adjusted Balance Method — This balance used to calculate the finance charge is derived by subtracting the payments you've made from the previous balance. This method is most favorable to the customer.
- Customer Service — Many issuers have 24-hour toll-free telephone numbers.
- Other Benefits — Issuers may offer additional benefits, some with a cost, such as: insurance, credit card protection, discounts, rebates, and special merchandise offers.
Shop among some of the credit card issuers listed 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.
Credit Card Features To Consider . . .
Smart consumers find the best deal for their budgets and repayment style. 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.
If you don't always pay off the credit card balance/s at the end of the month, be sure to look at the annual percentage rate.
|Terms||Card A||Card B|
|Average monthly balance||$2,500||$2,500|
|APR||x .18||x .14|
|Annual finance charges||$ 450||$ 350|
|Annual fee||+ $20||-0-|
|Total Cost||$ 470||$ 350|
Other features to consider are enhancements to the credit card that the issuer offers. Enhancements can include cash rebates, purchase protections, warranty guarantees and usage incentives such as frequent flyer miles.
See Interactive Credit Card Calculators:
Perks . . .
Also called "enhancements," these include cash-back rebates and frequent-flier mileage. Though perks sound appealing, these cards often have high interest rates, some charge you to use their incentives. Read the fine print.
If you're carrying large balances on high-interest cards, consider transferring the sum to a lower rate card. Make sure the interest rate after the lower initial rate is not higher then your present cards. And don't do it often — you may appear less creditworthy.
Also check to see if your current card issuer will match the new offer. All they can do is say "no."
See Interactive Credit Card Calculators: Which is better: Flight Card or Low Rate Card?
Credit Card Plan List . . .
The Federal Reserve System collects and publishes a report on the terms of credit card plans offered by financial institutions. This list includes information supplied by the largest card issuers in the country with the lowest APR.
The credit terms listed are subject to change. Consequently, readers are encouraged to contact the credit card issuer for current rates and to learn about their other credit plans.
Other Web Site for Current Rates:
cardweb.com helps you find some of the lowest rate credit cards.
If Your Application Is Denied . . .
If you're turned down for a card, ask why. It may be that you haven't been at your current address or job long enough. Or that your income doesn't meet the issuers criteria. Different credit card companies have different standards. But if you are turned down by several companies, it may indicate that you are not ready for a credit card.
If you've been denied credit because of information supplied by a credit bureau, federal law requires the creditor to give you the name and address of the bureau that supplied the information. If you contact that bureau within 30 days of receiving the denial, you are entitled to a free copy of your report. If your file contains accurate negative information, only time and good credit habits will restore your credit-worthiness. If you find an error in your report, you are entitled to have it investigated by the credit bureau and corrected at no charge.
Credi-Quette . . .
Once you get a card, sign it immediately so no one else can use it. Note that the accompanying papers have important information, like customer service telephone numbers, in case your card is lost or stolen. File this information in a safe place.
Call the card issuer to activate the card. Many issuers require this step to minimize fraud and to give you additional information.
Keep your account number to yourself. Never give out your credit card number or expiration date over the phone unless you know who your dealing with. A criminal can use this information to steal money from you, or even assume your credit identity.
Keep copies of sales slips and compare charges when your bill arrives. Promptly report in writing any questionable charges to the card issuer.
Don't lend your card to anyone, even to a friend. Your credit privilege and history are too precious to risk.
You're Responsible . . .
While a credit card makes it easy to buy something now and pay for it later, you can lose track of how much you've spent by the time the bill arrives if you're not careful. And if you don't pay your bill in full, you'll probably have to pay finance charges on the unpaid balance. What's more, if you continue to charge while carrying an outstanding balance, your debt can snowball. Before you know it, you're minimum payment is only covering the interest. If you start having trouble repaying the debt, you could tarnish your credit report. And that can have a sizable impact on your life. A negative report can make it more difficult to finance a car or home, get insurance, and even get a job.
Federal Protections . . .
Federal law offers the following protections when you use your cards.
- Errors on Your Bill. You must notify the card issuer in writing within 60 days after the first bill containing the error was mailed to you. In your letter, include your name; account number; the type, date, and amount of the error; and the reason why you believe the bill contains an error. In return, the card issuer must investigate the problem and either correct the error or explain to you why the bill is correct. This must occur within two billing cycles and not later than 90 days after the issuer receives your billing error notice. You do not have to pay the amount in question during the investigation.
- Unauthorized Charges. If your credit card is used without your authorization, you can be held liable for up to $50 per card. If you report the loss of a card before it is used, the card issuer cannot hold you responsible for any unauthorized charges. If a thief uses your card before you report it missing, the most you will owe for unauthorized charges is $50. You should be prompt in reporting the loss or theft of your card to limit liability.
For More Information . . .
See other Web Sites on Credit Cards.
The Federal Trade Commission (FTC) offers free booklets on credit and other topics of consumer interest. Access the FTC ConsumerLine. Or get a free copy of Best Sellers, a complete list of FTC publications, from Public Reference, Federal Trade Commission, Washington, D.C. 20580; (202) 326-2222; TDD: (202) 326-2502.
The Federal Consumer Information Center publishes the free Consumer Information Catalog, which lists more than 200 publications from a variety of federal agencies, including credit. Access the Catalog and its full-text entries or write to Catalog, Consumer Information Center, Pueblo, CO 81009. Or call them at (719) 948-4000.
American Express Company offers free consumer booklets on a variety of credit subjects. To order, contact: American Express Company, P.O. Box 4635, Trenton, NJ 08650-4635. For information about students and credit, you can visit American Express Student Services or access American Express Company.
Bankcard Holders of America (BHA) is a nonprofit consumer organization that provides credit information as well as customized advice on credit problems. You can write BHA, 524 Branch Drive, Salem, VA 24153; (540) 389-5445.
cardweb.com helps you find some of the lowest rate credit cards.
Note: The links on this page that go to web sites outside of this agency's control are provided as a convenience only. The Department takes no responsibility for their content.