Choosing the right credit card

Shopping around for a credit card can save you money on interest and fees. You’ll want to find one with features that match your needs. The following information can help you understand the features of credit cards, compare credit card features and costs, know your rights when using your credit card, and file a complaint if you have a problem with your credit card.

How will you use your credit card? - The first step in choosing a credit card is thinking about how you will use it. If you expect to always pay your monthly bill in full--and other features such as frequent flyer miles don’t interest you--your best choice may be a card that has no annual fee and offers a longer grace period.

If you sometimes carry over a balance from month to month, you may be more interested in a card that carries a lower interest rate (stated as an annual percentage rate, or APR). If you expect to use your card to get cash advances, you’ll want to look for a card that carries a lower APR and lower fees on cash advances. Some cards charge a higher APR for cash advances than for purchases.

What are the APRs?

The annual percentage rate--APR--is the way of stating the interest rate you will pay if you carry over a balance, take out a cash advance, or transfer a balance from another card. The APR states the interest rate as a yearly rate.

Multiple APRs - A single credit card may have several APRs:

• One APR for purchases, another for cash advances, and yet another for balance transfers - The APRs for cash advances and balance transfers often are higher than the APR for purchases (for example, 14% for purchases, 18% for cash advances, and 19% for balance transfers).
  
• Tiered APRs - Different rates are applied to different levels of the outstanding balance (for example, 16% on balances of $1–$500 and 17% on balances above $500).
  
• A penalty APR - The APR may increase if you are late in making payments. For example, your card agreement may say, “If your payment arrives more than ten days late two times within a six-month period, the penalty rate will apply.”
  
• An introductory APR - A different rate will apply after the introductory rate expires.
  
• A delayed APR - A different rate will apply in the future. For example, a card may advertise that there is “no interest until next March.” Look for the APR that will be in effect after March.

Fixed vs. variable APR - Some credit cards are “fixed rate”--the APR doesn’t change, or at least doesn’t change often. Even the APR on a “fixed rate” credit card can change over time. However, the credit card company must tell you before increasing the fixed APR.

Other credit cards are “variable rate”--the APR changes from time to time. The rate is usually tied to another interest rate, such as the prime rate or the Treasury bill rate. If the other rate changes, the rate on your card may change, too. Look for information on the credit card application and in the credit card agreement to see how often your card’s APR may change (the agreement is like a contract--it lists the terms and conditions for using your credit card).

How long is the grace period?

The grace period is the number of days you have to pay your bill in full without triggering a finance charge. For example, the credit card company may say that you have “25 days from the statement date, provided you paid your previous balance in full by the due date.” The statement date is given on the bill.

The grace period usually applies only to new purchases. Most credit cards do not give a grace period for cash advances and balance transfers. Instead, interest charges start right away.

If you carried over any part of your balance from the preceding month, you may not have a grace period for new purchases. Instead, you may be charged interest as soon as you make a purchase (in addition to being charged interest on the earlier balance you have not paid off). Look on the credit card application for information about the “method of computing the balance for purchases” to see if new purchases are included or excluded. Information on methods of computing the balance is in the section “How is the finance charge calculated?”

How is the finance charge calculated?

The finance charge is the dollar amount you pay to use credit. The amount depends in part on your outstanding balance and the APR. Credit card companies use one of several methods to calculate the outstanding balance. The method can make a big difference in the finance charge you’ll pay. Your outstanding balance may be calculated over one billing cycle or two, using the adjusted balance, the average daily balance, or the previous balance, and including or excluding new purchases in the balance.

Depending on the balance you carry and the timing of your purchases and payments, you’ll usually have a lower finance charge with one-cycle billing and either the average daily balance method excluding new purchases,
the adjusted balance method, or the previous balance method.

Minimum finance charge - Some credit cards have a minimum finance charge. You’ll be charged that minimum even if the calculated amount of your finance charge is less. For example, your finance charge may be calculated to be 35¢--but if the company’s minimum finance charge is $1.00, you’ll pay $1.00. A minimum finance charge usually applies only when you must pay a finance charge--that is, when you carry over a balance from one billing cycle to the next.

What are the fees?

Most credit cards charge fees under certain circumstances:

Annual fee - (sometimes billed monthly). Charged for having the card

Cash advance fee - Charged when you use the card for a cash advance; may be a flat fee (for example, $3.00) or a percentage of the cash advance (for example, 3%)

Balance-transfer fee - Charged when you transfer a balance from another credit card (Your credit card company may send you “checks” to pay off the other card. The balance is transferred when you use one of these checks to pay the amount due on the other card.)

Late-payment fee - Charged if your payment is received after the due date

Over-the-credit-limit fee - Charged if you go over your credit limit

Credit-limit-increase fee - Charged if you ask for an increase in your credit limit

Set-up fee - Charged when a new credit card account is opened

Return-item fee - Charged if you pay your bill by check and the check is returned for non-sufficient funds (that is, your check bounces)

Other fees - Some credit card companies charge a fee if you pay by telephone (that is, if you arrange by phone for payment to be transferred from your bank to the company) or to cover the costs of reporting to credit bureaus, reviewing your account, or providing other customer services. Read the information in your credit card agreement to see if there are other fees and charges.

What are the cash advance features?

Some credit cards let you borrow cash in addition to making purchases on credit. Most credit card companies treat these cash advances and your purchases differently. If you plan to use your card for cash advances, look for information about:

Access - Most credit cards let you use an ATM to get a cash advance. Or the credit card company may send you “checks” that you can write to get the cash advance.

APR - The APR for cash advances may be higher than the APR for purchases.

Fees - The credit card company may charge a fee in addition to the interest you will pay on the amount advanced.

Limits - Some credit cards limit cash advances to a dollar amount (for example, $200 per cash advance or $500 per week) or a portion of your credit limit (for example, 75% of your available credit limit).
How payments are credited. Many credit card companies apply your payments to purchases first and then to cash advances. Read your credit card agreement to learn how your payments will be credited.

How much is the credit limit?

The credit limit is the maximum total amount--for purchases, cash advances, balance transfers, fees, and finance charges--you may charge on your credit card. If you go over this limit, you may have to pay an “over-the-credit-limit fee.”

What kind of card is it?

Most credit card companies offer several kinds of cards:

Secured cards - Which require a security deposit. The larger the security deposit, the higher the credit limit. Secured cards are usually offered to people who have limited credit records--people who are just starting out or who have had trouble with credit in the past.

Regular cards - Which do not require a security deposit and have just a few features. Most regular cards have higher credit limits than secured cards but lower credit limits than premium cards.

Premium cards (gold, platinum, titanium) - Which offer higher credit limits and usually have extra features--for example, product warranties, travel insurance, or emergency services. The extra features may or may not be of any value to you, so make sure this card does not come with an anual fee.

Does the card offer incentives and other features?

Many credit card companies offer incentives to use the card and other special features:

Rebates (money back on the purchases you make

Frequent flier miles or phone-call minutes

Additional warranty coverage for the items you purchase

Car rental insurance

Travel accident insurance or travel-related discounts

Credit card registration, to help if your wallet or purse is lost or stolen and you need to report that all your credit cards are missing.

Credit cards may also offer, for a price:

Insurance to cover the payments on your credit card balance if you become unemployed or disabled, or die. Premiums are usually due monthly, making it easy to cancel if the payments are higher than you want to pay or you decide you don’t need the insurance any longer.

Insurance to cover the first $50 of charges if your card is lost or stolen. Under federal law, you are not responsible for charges over $50.

Before you sign up to pay for any of the above features, think carefully about whether it will be useful for you. Don’t pay for something you don’t want or don’t need.

What are your liability limits?

If your credit card is lost or stolen--and then is used by someone without your permission--you do not have to pay more than $50 of those charges. This protection is provided by the federal Truth in Lending Act. You do not need to buy “credit card insurance” to cover amounts over $50.

If you discover that your card is lost or stolen, report it immediately to your credit card company. Call the toll-free number listed on your monthly statement. The company will cancel the card so that new purchases cannot be made with it. The company will also send you a new card.

Make a list of your account numbers and the companies’ phone numbers. Keep the list in a safe place. If your wallet or purse is lost or stolen, you’ll have all the numbers in one place. Take the list of phone numbers--not the account numbers--with you when you travel, just in case a card is lost or stolen.

What can you do about billing errors?

The federal Fair Credit Billing Act covers billing errors. Examples of billing error are:

A charge for something you didn’t buy

A bill for an amount different from the actual amount you charged

A charge for something that you did not accept when it was delivered

A charge for something that was not delivered according to agreement

Math errors

Payments not credited to your account

A charge by someone who does not have permission to use your credit card

If you think your credit card bill has an error, take the following steps:

1. Write to the credit card company within 60 days after the statement date on the bill with the error. Use the address for “billing inquiries” listed on the bill. Tell the company your name and account number, that you believe the bill contains an error, and why you believe it’s wrong, and the date and amount of the error (the “disputed amount”).

2. Pay all the other parts of the bill. You do not have to pay the “disputed amount” or any minimum payments or finance charges that apply to it. If there is an error, you will not have to pay any finance charges on the disputed amount. Your account must be corrected.

If there is no error, the credit card company must send you an explanation and a statement of the amount you owe. The amount will include any finance charges or other charges that accumulated while you were questioning the bill.

What if the item you purchase is damaged?

The federal Fair Credit Billing Act allows you to withhold payment on any damaged or poor-quality goods or services purchased with a credit card--even if you have accepted the goods or services--as long as you have made an attempt to solve the problem with the merchant.

The sale must have been for more than $50 and must have taken place in your home state or within 100 miles of your home address. You should notify the credit card company in writing and explain why you are withholding your payment.

You may withhold the payment while the credit card company investigates your claim. If you pay the charges for the goods on your credit card bill before the dispute is resolved, you will lose your right to make a claim.

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