CONTENTS
Definition
of Terms
Calculation
of Finance Charge
Credit
Card Owner's Checklist
Survey
Results
Survey
Smart consumers do comparison shopping when looking for credit such as a mortgage or an auto loan. It is also a good practice to engage in when shopping for a credit card plan, because the choices you make could save you money.
among the various plans of credit card issuers contained 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. The costs and terms of the plan or plans can make a difference to how much you pay for the privilege of borrowing.
In the disclosure form from the credit card issuer, key credit terms to consider are the annual percentage rate (APR), annual fee, and grace period. Also consider credit terms such as cash advance fees, late payment charges, and over-the-limit fees.
Take these items into consideration along with how you pay your bills each month, whether in full or only partially. You could save yourself some money.
Annual Fee
A flat, yearly charge similar to a membership fee
Annual Percentage Rate (APR)
A measure of the cost of credit that expresses
the finance charge, which includes interest and may also include other
charges, as a yearly rate.
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.
Grace Period
A time, about 25 days, during which you can pay
your credit card bill without paying a finance charge. Under almost all
credit card plans, the grace period only applies if you
pay your balance in full each month. It does not apply if you carry a
balance forward. Also, the grace period does not apply to cash advances.
Interest Rate
Interest rates on credit card plans change over
time. Some are explicitly tied to changes in other interest rates such as
the prime rate or the Treasury Bill rate and are called variable
rate plans. Others are not explicitly tied to changes in other
interest rates and are called fixed rate plans.
Variables and Impact - Calculation of Finance Charge
It is helpful to know how the credit card issuer will calculate the finance charge on your credit card bill. To determine the finance charge, an issuer will apply a periodic rate to a balance. Card issuers use different balance calculation methods such as: the average daily balance method, the previous balance method, and the adjusted balance method.
With the average daily balance method (the most common method), the issuer calculates the balance by taking the amount of debt you had in your account each day during the period covered by the billing statement and averages it. With the previous balance method, the issuer uses the balance outstanding at the end of the previous period—that is, the period prior to the one covered by the billing statement. With the adjusted balance method, the balance is derived by subtracting the payments you’ve made from the previous balance.
Combinations
to Consider
Smart consumers find the best deal for their
budgets and repayment style. For example, 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 monthly, be sure to look at the periodic rate that will be used to calculate the finance charge.
Credit card issuers that offer variable interest rate plans derive the rate to be charged to the consumer by using a formula. Two of the most common formulas are:
Some of the more common indexes used by credit card issuers are the prime rate, the one-, three-, or six-month Treasury Bill rate, the federal funds or Federal Reserve discount rate. Most of these indexes can be found in the money or business section of major newspapers. Once the interest rate corresponding to the index has been identified, the issuer then adds a number of percentage points, the “margin”, to this index rate to calculate the rate charged.
In some cases, the issuer might elect to use another formula to determine the rate to be charged to the consumer. The issuers multiply the index or index plus the margin by another number, “the multiple”, to calculate the rate charged.
Possible
Savings
The following is an example of the annual savings you could achieve by switching to a credit card plan with a lower interest rate and no annual fee.
Assumption
In
this example, the average monthly balance carried forward equals $2,500,
which is about the national average for consumers with credit card debt.
Plan Descriptions:
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In this example, the total possible savings each year achieved by selecting a credit card plan with a lower interest rate and no annual fee is ($470 – $350) $120.
If you are applying for your first credit card or have several cards already, here are some helpful tips you might want to follow in shopping for a credit card.
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Every six months the Federal Reserve System collects and publishes a report on the terms of credit card plans offered by financial institutions. This report includes information supplied by the largest card issuers in the country, as well as any other financial institutions that indicate to the Federal Reserve System that they would like to participate in the report and submit information about their credit card plans. The credit terms listed in this report are as of the date indicated below and are subject to change. Consequently, readers are encouraged to contact the credit card issuer for current rates and to learn about their other credit card plans.
Codes
Used in
the Credit Card
Plan List
Availability
Refers to
availability of card to consumers:
N = national
R = only in selected
states
State abbreviation = only in state specified
Type of
Pricing
F = fixed
V = variable
T = tiered
pricing, with different periodic rates applying to different levels of the
outstanding balance. The rate shown applies to the lowest of the balance
tiers.
Index
The
interest rate on variable rate plans is based on an index. The codes shown
in the credit card plan list correspond to the following indexes.
1 = prime rate
2 = one-month Treasury bill rate
3 = three-month Treasury bill rate
4 = six-month Treasury bill rate
5 = one-year Treasury bill rate
6 = federal funds rate
7 = cost of funds
8 = Federal Reserve discount rate
9 = other
Grace
Period
Indicates that no finance charge will be imposed
for credit extended on purchases if payment in full is received by the
payment due date after the end of the billing period in which the purchase
was made. Generally, a grace period allows customers to avoid finance
charges on purchases if they always pay their credit card bill in full by
the due date of the bill. Grace periods usually do not apply to cash
advances, which begin accruing interest from the day of the transaction.
Other
Features
Credit card issuers may automatically add
enhancements or other features in the plan without charging extra fees.
Enhancements can include cash rebates, purchase protections, warranty
guarantees, travel accident or automobile rental insurance, discounts on
goods and services purchased, and usage incentives such as frequent flyer
miles.
1 = rebates on purchases 2 = extension of manufacturer’s warranty 3 = purchase protection/security 4 = travel accident insurance 5 = travel related discounts 6 = automobile rental insurance 7 = nontravel related goods or services 8 = credit card registration 9 = reduced introductory interest rate available 10 = other (not specified) N.R. = not reported
The current survey is available in Adobe Acrobat as a PDF file as well as in ASCII. Obtain the Acrobat Reader.
Date of This
Survey
This Survey is conducted semi-annually. The
credit terms shown in this brochure were in effect as of July 31, 1999.