Credit Cards: How to choose

Credit CARD Act of 2009

Known as the Credit CARD Act of 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009 went into effect on February 22, 2010. The legislation strengthens consumer protection in the credit card market and is a comprehensive reform measure to protect credit card holders in the US against unfair interest rate hikes and hidden fees. Specifically, the legislation addresses:

• Unfair Rate Increases
• Unfair Fee Traps
• Plain Sight /Plain Language Disclosures
• Accountability of Credit Card Issuers
• Protections for Students and Young People

Even with the new law in place, consumers should still be wary and shop around for the credit card that’s best for them.

Examine The Card’s Terms

To choose a credit card wisely, you must first review and understand the terms and features of the various cards. This can add up to very respectable savings over a period of time. In addition, you should also know how use your cards wisely to keep your costs to a minimum. The Financial Guide explains how to achieve these goals.

Chances are you have received offers in the mail asking if you would like to open credit card accounts. Frequently, these offers say that you have been “pre-approved” for the card, often with a very attractive interest rate (usually, a short-term “low-ball” rate) and with a line of credit purportedly set aside for your use (although few people ultimately qualify for the credit line in the promotional literature). Typically, these offers urge you to accept quickly, “before the offer expires.” However, before accepting a credit card offer, understand the card’s credit terms and compare costs of similar cards to get the terms and features you want.

Making an informed decision about a credit card is largely a matter of finding out what the actual cost of credit is under that card. Credit cards involve not only a “finance charge” – a charge for the convenience of borrowing – but usually other, less obvious charges as well.

Learn which credit terms and conditions apply. Each affects the overall cost of the credit you will be using. Due to the provisions of the Fair Credit and Charge Card Disclosure Act (1998), you can compare terms and fees before you agree to open a credit card or charge card (no interest) account. Be sure to consider and compare the terms listed below, which both direct-mail applications and pre-approved solicitations must reveal.

Which card is best for you may depend on how you plan to use it. If you plan to pay bills in full each month, the size of the annual fee or other fees, and not the periodic and annual percentage rate, may be more important. If you expect to use credit cards to pay for purchases over time, the APR and the balance computation method are important terms to consider. In either case, keep in mind that your costs will also be affected by the grace period.

Annual Percentage Rate

The “annual percentage rate,” or APR, is disclosed to you when you apply for a card, again when you open the account, and on each bill you receive. It is a measure of the cost of credit, expressed as a yearly rate.

The card issuer also must disclose the “periodic rate,” the rate the card issuer applies to your outstanding account balance to figure the finance charge for each billing period.

Variable Rates

Some credit card plans allow the card issuer to change the annual percentage rate on your account when interest rates or other economic indicators (called indexes) change. Because the rate change is linked to the performance of the index, which may rise or fall, these plans are commonly called “variable rate” plans. Rate changes raise or lower the amount of the finance charge you pay on your account. If the credit card you are considering has a variable rate feature, the card issuer must tell you that the rate may vary and how the rate is determined, including which index is used and what additional amount (the “margin”) is added to the index to determine your new rate. You also must be told how much and how often your rate may change.

Related Guide: If you find yourself in financial trouble, please see the Financial Guide: GETTING OUT OF FINANCIAL TROUBLE: Steps You Can Take.

Grace Period

A grace period allows you to avoid the finance charge by paying your current balance in full before the due date shown on your statement. Knowing whether a credit card plan gives you a grace period and the length of this period is especially important if you plan to pay your account in full each month.

If there is no grace period, the card issuer will impose a finance charge from the date you use your credit card or from the date each credit card transaction is posted to your account. If your credit card allows a grace period, the card issuer must mail your bill at least 14 days before your payment is due. This policy ensures that you have enough time to make your payment by the due date.

Caution: The grace period is generally misleading. The period does not start when the statement is mailed and end when your check is received, as many consumers believe. In fact, it usually starts a few days before the statement is mailed and ends a few days after the payment is received, based on certain accounting dates adopted by the credit card company. Consequently, a 25-day grace period (a fairly common period) for paying the statement may water down to a much shorter period.

Annual Fees

More than nine out of 10 cards (95 percent) had no annual fee in 2011 up from 90 percent in 2010 according to BankRate.com, making it easier than ever to find a credit card with no annual fee. On credit cards that did carry annual fees, the fees ranged from $15 to $39.

Transaction Fees and Other Charges

A credit card also may involve other types of fees. For example, some card issuers charge a fee when you use the card to obtain a cash advance, when you fail to make a payment on time (late fees), or when you go over your credit limit (over-limit fees). The Credit CARD Act of 2009 also addresses

The Credit CARD Act of 2009 specifically addresses late fees and over-limit fees in that card holders must be given at least 21 days from the time of mailing to pay their bill and all late fee “traps” such as weekend deadlines and due dates that change each month are eliminated. In addition, the law helps consumers avoid over-limit fees because issuing institutions must now obtain a consumer’s permission to process transactions that would place the account over the limit.

Balance transfer fees are incurred when balances are transferred from high interest credit cards to lower interest cards. Fees for balance transfers are typically based on a percentage of the amount being transferred (typically 3% or 5%), with limits on minimum or maximum fee amounts. Many credit card issuers offer zero percent interest on balance transfers for the first six to 12 months that revert to regular interests rates at the end of the promotion period.

Other types of fees can include foreign transaction fees, fees for receiving a copy of monthly statements, replacing lost cards, or for using the credit card as a source of funds for overdraft protection.

Balance Computation Method for the Finance Charge

If your plan has no grace period or if you expect to pay for purchases over time, it is important to know how the card issuer will calculate your finance charge. This charge will vary depending upon the method the card issuer uses to figure your balance. The method used can make a difference, sometimes a big difference, in how much finance charge you will pay-even when the APR is identical to that charged by another card issuer and the pattern of purchases and payments is the same.

Thanks to the Credit CARD Act of 2009, credit card issuers are now required to show consumers on their periodic statements how long it would take to pay off the existing balance – and the total interest cost – if the consumer paid only the minimum due, as well as the payment amount and total interest cost to pay off the existing balance in 36 months.

Average Daily Balance

The average daily balance method (including or excluding new purchases) gives you credit for your payment from the day the card issuer receives it. To compute the balance due, the card issuer totals the beginning balance for each day in the billing period and deducts any payments credited to your account that day. New purchases may or may not be added to the balance, depending on the plan, but cash advances typically are added. The resulting daily balances are added up for the billing cycle and the total is then divided by the number of days in the billing period to arrive at the “average daily balance.” This is the most common method used by credit card issuers.

Adjusted Balance

This balance is computed by subtracting the payments you made and any credits you received during the present billing period from the balance you owed at the end of the previous billing period. New purchases that you made during the billing period are not included. Under the adjusted balance method, you have until the end of the billing cycle to pay part of your balance and you avoid the interest charges on that portion. Some creditors exclude prior, unpaid finance charges from the previous balance. The adjusted balance method usually is the most advantageous to card users.

Previous Balance

As the name suggests, this balance is simply the amount that you owed at the end of the previous billing period. Payments, credits, or new purchases made during the current billing period are not taken into account. Some creditors also exclude unpaid finance charges in computing this balance. If you do not understand how the balance on your account is computed, ask the card issuer. (An explanation of how the balance was determined must appear on the billing statements the card issuer provides you and on applications and pre-approved solicitations the card issuer may send you.)

Considerations Other Than Cost

When shopping for a credit card, you probably will want to look at other factors besides cost, such as whether the credit limit is high enough to meet your needs, how widely the card is accepted, and what services and features are available under the plan. You may be interested, for example, in “affinity cards,” all-purpose credit cards that are sponsored by professional organizations, college alumni associations, and some members of the travel industry. Frequently, an affinity card issuer donates a portion of the annual fees or transaction charges to the sponsoring organization or allows you to qualify for free travel or other bonuses.

How Different Balance Computations Affect The Cost of Credit

“While the interest rate is a major factor in determining your interest cost, the method of computing the balance to which the interest rate is applied can also be significant. The following table shows how your interest cost can vary when the Average Daily Balance, Adjusted Balance and Previous Balance methods are used.”

* To figure average daily balance (including new purchases):

($400 x 15 days) + ($100 x 3 days) + ($150 x 12 days) divided by 30 days = $270

** To figure average daily balance (excluding new purchases):

($400 x 15 days) + ($100 x 15 days) divided by 30 days = $250

Rebate and Rewards Cards: Are They a Good Deal?

The use of rebate and rewards cards has grown rapidly. Costco for example sponsors a credit card (Costco Cash Rebate card) that give rebates on the cost of merchandise you buy with the card once you spend a certain amount. You usually get larger rebates on the sponsoring company’s products and lower rebates on other card charges. Credit card solicitations promise cash, frequent-flier miles or points that will buy everything from hotel rooms to gas.

Tip: You will get a good deal from a rebate card if you spend a lot, and if you pay your bill in full each month. If you carry a balance on the card, what you gain in rebates you will lose in the excessive interest charged by credit cards.

Use It Wisely

Here are some suggestions for the use of credit cards:

1. Pay bills promptly to keep finance charges as low as possible.

Tip: Keep copies of sales slips and promptly compare charges when your bills arrive.

2. Keep a list of your credit card account numbers, telephone numbers of each card issuer, and login information (if you pay your credit cards online) in a safe place in case your cards are lost or stolen.

3. Protect your credit cards and account numbers to prevent unauthorized use.

Tip: Draw a line through blank spaces above the total when you sign receipts. Rip up or retain carbons.

4. Deal only with reliable firms. Check with your local consumer protection agency or the Better Business Bureau (BBB) closest to where the business is located. Study the advertising offer carefully. Ask the company about its warranty, refund and exchange policies. If you cannot get the answers to your questions, or there are any doubtful claims, don’t buy.

5. Never Send Cash. Never give out your credit, debit charge card, or bank account number unless you have checked out the company or have done business with them before.

Tip: Try to pay by charge or credit card, so that you have record in the event of a dispute with the merchant.

How To Dispute Improper Charges

If there is a problem with your order, for instance if you were billed for the wrong amount, you never got the product, the goods arrived in damaged condition, or the merchandise or services were misrepresented, then try to resolve it by following these steps:

When you have charged your purchase, you are entitled to a response to your complaint within 30 days, and the problem must be resolved within two billing cycles (but not more than 90 days). If you used a debit card, you are entitled to a response within 10 days. However, if the financial institution that issued the card needs more time, it may take up to 45 days, provided it credits your account with the disputed amount until the dispute is resolved.

Related Guide: For a listing of what merchants are allowed to ask, please see the Financial Guide: MERCHANT CREDIT CARD ABUSES: What They Cannot Ask You To Do

1. Write immediately to the company from whom you ordered, explaining the problem and asking for a specific resolution. Be sure to include your name, address, and daytime phone number, your order or invoice number, copy of canceled check, or any other helpful information about your purchase. You generally have 60 days after receiving a bill to dispute charges. Pay any other charges on your bill that you are not disputing.
2. If you charged your purchase to a charge or credit card account, or you arranged for the payment to be automatically withdrawn from a bank account, send a copy of your letter to the card issuer or bank.

Related Guide: For a more in-depth discussion of your rights in the event of a dispute with a merchant, please see the Financial Guide: YOUR CREDIT CARD RIGHTS: What To Do If You Have A Problem.

Government and Non-Profit Agencies

The following agencies are responsible for enforcing federal laws that govern credit card transactions. Questions concerning a particular card issuer should be directed to the enforcement agency responsible for that issuer.

• State Member Banks of the Reserve System:

Consumer & Community Affairs
Board of Governors of the Federal Reserve System
20th & Constitution Avenue, N.W.
Washington, D.C. 20551

• National Banks:

Comptroller of the Currency
Customer Assistance Group
1301 McKinney Street
Suite 3450
Houston, TX 77010
Tel. (800) 613-6743

• Federal Credit Unions:

National Credit Union Administration
1775 Duke St # 4206
Alexandria, VA 22314-6115

• Non-Member Federally Insured Banks:

Federal Deposit Insurance Corporation
Consumer Response Center
1100 Walnut St, Box #11
Kansas City, MO 64106

• Federally Insured Savings and Loans, and Federally Chartered State Banks:

Comptroller of the Currency
Customer Assistance Group
1301 McKinney Street
Suite 3450
Houston, TX 77010
Tel. (800) 613-6743

• Other Credit Card Issuers (includes retail gasoline companies):

Bureau of Consumer Protection
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, D.C. 20580

• The U.S. Postal Inspection Service:

This office covers mail fraud, sexually offensive materials, solicitations that look like government materials but are not. If you suspect such violations, contact your local Postmaster or Postal Inspector or:

Criminal Investigations Service Center
Attn: Mail Fraud
222 S. Riverside Plaza Ste. 1250
Chicago Il 60606-6100
Tel. 877-876-2455

• The Federal Trade Commission:

Does not handle individual complaints, but reporting failure to deliver, late delivery, unordered merchandise, misrepresentation or fraud helps uncover widespread abuses that the FTC might take action to stop.

Division of Enforcement
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, DC 20580
Tel. (202) 326-2222

• National Do Not Call Registry:

If you wish to have your name removed from telephone lists of marketing companies.

National Do Not Call Registry
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, DC 20580
website: www.donotcall.gov

• Direct Marketing Mail Opt-Out:

Consumers who do not wish to receive promotional mail at home

Direct Marketing Association
1120 Avenue of the Americas
NY, NY New York, NY 10036-6700
Tel. 212.768.7277
website: www.DMAChoice.org

• Low or No-Cost Credit Cards:

Bankrate.com lists banks charging no fees and low interest rates for credit cards. Visit the website: www.bankrate.com