RESPONSIBLE USE OF CREDIT CARDS
about credit Cards
Credit cards are called revolving credit because as you pay the money back, your credit becomes available for you to use again and again. (A second type of credit is installment credit. If you have an installment loan, you borrow the money just once and repay the lender in equal amounts, over a fixed period of time, like a car loan.)
No one card is right for everyone. As a general rule, the right card for you is one that’s accepted where you shop and charges you the least amount of money (for example, in interest and fees) for the services you use. The terms and conditions for credit cards vary, so it’s important to educate yourself about the costs for any credit card you’re considering. Be sure to carefully read the terms and conditions, legal disclosures, and credit card agreement.
How credit cards work
Every time you use a credit card, you’re actually borrowing money from the financial institution that issued you the card. You may initiate a credit card transaction in an actual store, online, or even by using an app on your phone. When you do, information about your transaction and credit card is shared automatically and securely. Once the transaction is approved, the bank credits the merchant and records the charges to be billed to you, the cardholder, at the end of the billing period. When you receive the monthly statement, you pay the entire in full or in monthly installments, with interest. Essentially, the bank pays first and you have to pay them back. If you pay it off when you get you bill, you don’t pay interest. But if you can’t pay in full, you will have to pay interest.
Remember: debit cards work differently! When you use a debit card at a store, you may have the option of selecting “debit” and entering your PIN, or “credit” and signing your name. Either way, the money is deducted from your checking account.
Applying for a card
When you apply for a credit card, the financial institution will check your credit history and decide whether or not to give you a card. They’ll also decide how much you’re allowed to borrow, or “charge.” This is called your credit limit.
Variable vs. fixed-rate credit cards
Whether the credit card plan uses a variable- or fixed-rate in charging interest can have a significant effect on what you pay to use your card.
Variable-rate plans may offer a lower interest rate than fixed, but keep in mind that the interest rate can go up or down. Credit card companies offering variable-rate plans adjust the interest rate you pay typically based on the prime interest rate. The prime interest rate is what U.S. banks charge their best customers. Many variable-rate plans interest rate is the prime interest rate plus a certain amount. Be sure to check to see if there are limits on how high or how low your interest rate can go.
With a fixed-rate plan, you have the advantage of knowing what your rate will be. The Truth in Lending Act requires lenders to provide at least 15 days’ notice before raising the rate, and in some states, even more notice is required.
About “pre-approved” credit card offers
Be cautious about any credit card offers you receive. Many cards may offer a low, promotional interest rate or attractive balance transfer terms to encourage you to apply for credit. These introductory and promotional rates will change so carefully read the terms and conditions. It’s important to understand any fees, interest, or obligations.
Shred, or use scissors to cut into small pieces, any offers you don’t want before you toss them into the garbage. This will help prevent someone from stealing it and trying to obtain credit in your name, which is a crime called identity theft.
Secured vs. unsecured cards
A secured credit card is a credit card backed by collateral, often a savings account. The money in an account, often a savings account, is collateral. This money set aside as collateral can be claimed by the company issuing the card if the you don’t honor your payment terms or agreement. Using a secured credit card and paying according to the terms of the agreement can be a good first step for individuals or businesses that want to establish or rebuild their credit.
An unsecured card has no collateral. Like the description of a secured card, with an unsecured credit card, you will not forfeit funds in an account if you don’t pay.
Every month, your credit card company will send you a monthly statement. Each statement will list all of the charges and payments you have made and fees and interest charges since your last billing statement, the total amount you currently owe, the minimum payment due and the due date, the amount of credit you have available and the date your current billing cycle closed.
Additionally each statement includes a late payment warning which shows the consequences of sending your payment late. A minimum payment warning which will show you how long it will take you to pay off your current balance if you were just to make the minimum payment and what that would mean to you in terms of time and interest charged. Your card issuer must also show you the monthly payment you would need to make to pay your current balance off in three years and the total amount you would pay doing so.
Your statement also includes a credit counseling notice that will provide you with the contact information for a nonprofit credit counseling agency that you can contact if you having problems paying your credit card payments.
Note: Credit cards can be more convenient than carrying cash, but remember, you always have to pay the money back. Lots of financial institutions offer credit cards; shop around for a low interest rate.
Truth in Lending Act
Enacted in 1968, this federal law says that creditors have to give consumers complete and accurate information about credit costs and terms. The Truth in Lending Act requires credit card companies to provide consumers with the following information:
- Finance charges in dollars and as an annual percentage rate (APR).
- Credit issuer or company providing the credit line.
- Size of the credit line.
- Length of the grace period, if any, before payment must be made.
- Minimum payment required.
- Annual fees, if applicable.
- Fees for credit insurance (if any), which pays off your loan if you die before the debt is fully repaid.
For more information on Credit Card Regulations, please visit www.federalreserve.gov/consumerinfo/consumercredit.htm
shopping for credit cards
To be a smart money manager, compare credit card offers just as you would any loan. There can be a lot of features and fees to compare. Here are some tips to help you get started:
Consider what is important to you and what purpose the credit card will serve. Make a list of credit card features and benefits, like interest rate, rewards, no annual fee, etc., that fit your financial needs. Rank the features according to how you plan to use the card and pay your monthly bill.
There are plenty of places, both online and offline, where you can read about credit card offers and how they compare. Rates and other terms as well as benefits vary. Review all of the information you’ve gathered. Read carefully and call the company if you have questions or need clarification. Pay special attention to the annual percentage rate (APR), annual fees, late payment fees, and terms associated with benefits or rewards. While you may want a card that offers cash rebates, discounts, or other rewards, remember that you only want to charge what you can afford to pay when your bill is due.
• Interest and interest rates (APR). Interest is the amount of money paid in exchange for the use of the lender’s money for a certain period of time. For credit cards, the interest rate is usually presented as the annual percentage rate (APR). The APR expresses the total cost of credit as a yearly rate, taking into account a loan’s interest rate, term, and fees. The lower the APR, the lower the total cost of borrowing.
• Annual fee, finance charge, grace period. Some financial institutions charge an annual fee for their credit cards. This fee is the amount they charge a credit card holder to use the card for a year.
• Finance charge. Finance charges are the amount of money (interest) a borrower pays to a lender for the privilege of borrowing money, including interest and other service charges.
• Grace period. The grace period is the length of time, as defined in the card member agreement, between the use of credit to make a purchase and when interest will begin to accrue on the amount charged.
If you are considering getting a new card or swapping cards, be sure that you’re making a good move. If you are a current cardholder and have a good credit rating, call and ask if you are eligible for comparable promotions. The lender may offer you better terms to keep your business.
If you want to cancel a credit card, contact the issuer of the card directly and request your account to be closed. Also, ask for a confirmation letter. Simply not using the card will not cause it to cancel.
CREDIT CARD BEST PRACTICES
Tips for credit card users:
- Look for low-fee, low-interest. Get a credit card with no – or a low – annual fee and low interest rate. Be sure to carefully and thoroughly read your cardholder agreement. It spells out all the fees and finance charges. Call your card company’s customer service number if you have questions.
- Pay off as much as you can. Set a goal to pay your balance in full each month. If you can’t do that, make at least the minimum payment each month and pay more if you can. This will reduce the finance charges you pay.
- Keep within your limit. Track your credit card charges throughout the month. If you stay within your credit limit, you’ll avoid over-the-limit fees and damaging your credit rating. Try to keep your credit card balance as low as possible and by try not to charge more than 30% of your credit limit at all times . That will help you build credit and potentially increase your credit score by showing lenders that you can control how much credit you use, and it leaves credit available in case of an emergency.
- Be sure you can afford it. Don’t use your credit cards to buy things you really can’t afford. Follow your spending plan.
- Pay on time. Pay your credit card bills on time. This is one of the best ways to build good credit because it shows lenders that you’re reliable. It also helps you avoid late fees.
- Understand terms of cash advances and balance transfers. Some credit card companies may offer you a cash advance or balance transfer options. If you choose the cash advance option, you will likely be charged a fee and a higher interest rate (than compared to rates for purchases and your interest charges may begin immediately with no grace period). If you choose the balance transfer option, carefully review the terms and conditions so you are aware of any fees that might be involved.
- Get debt help early. If you feel financially overwhelmed, ask for help early. Contact your lender. Try to work out a repayment plan that works for both of you. You may also want to consider talking with a reputable, non-profit credit counselor, an experienced professional, who can help you get out of debt.
- Pay on time. Ask your credit card issuer if it offers automatic payment options or email alerts to remind you when a payment is due.
- Read your cardholder agreement — all of it. The agreement spells out fees and finance charges, so make sure you understand the terms. If you have questions, don’t hesitate to ask your card issuer’s customer service agent.
- Learn the facts about finance charges. If you don’t pay the entire amount due within the grace period, you may be charged interest on the unpaid amount. Understanding how creditors calculate interest can help you to manage your costs. Make sure you know the Annual Percentage Rate (APR), Periodic Rate, and the method the creditor uses to calculate interest.
- Know your credit limit. Monitor your account so you know how much available credit you have. Stay well below your limit in case you need to make an emergency purchase.
- Create a budget and stick to it. Budgeting helps you keep control of your finances and resist spending sprees. If you plan ahead, you’ll know whether or not you can afford a particular purchase.
- Reduce your debt. Keep your credit card balance low and don’t take on more debt than you can handle. This may also help your credit score.
- Limit cash advances. These advances often incur higher fees and finance charges.
- Applying for a new account? Think first. When a potential lender requests your credit report, an “inquiry” registers on your report. A high number of inquiries may negatively affect your credit score, so only apply for a new account when you really need it.
- Prevent credit card fraud. Keep close tabs on the activity in your account. Many credit card companies allow you to check your account activity online at any time. Make sure that each transaction was made by you. If you notice suspicious activity, report it to your credit card issuer immediately.
- Review your credit report. At the Web site www.annualcreditreport.com, you can receive one free copy of your credit report once a year from each of the three largest credit bureaus in the United States.
For more information on Credit Card Regulations, please visit www.federalreserve.gov/consumerinfo/consumercredit.htm.
how to read your credit CARD Statement
- Your credit card account number — Remember to keep it a secret, or others can use your account.
- The closing date of the statement is the date the credit card company created this statement.
- The amount of your credit line is your spending limit.
- Available credit is the amount of your credit that you haven’t borrowed yet, so it’s still available to you.
- The account summary section summarizes your transactions.
- Payment information shows the total amount you now owe, which is also called your new balance.
- The minimum payment — Each month you must pay at least this portion of what you owe. If you wish, you may pay more than the minimum, up to the total amount, if you can. If you want to have good credit, and reduce the amount of interest you’ll pay, it’s a good idea to pay more than the minimum payment each month.
- The payment due date — Unless your credit card company receives your payment by this date, they will begin charging you interest on the amount you owe. Most companies will also charge you a late fee. They may also increase your interest rate.
- Rate information shows you how the interest and fees are being calculated.
- In the transactions section, you’ll see a list of each charge and payment you made in date order.
- The Payment Coupon repeats your current payment information. Include this coupon with your check if you pay by mail, and be sure to write in your new address if you’ve moved.
Remember: With a savings account you earn interest; when you borrow you pay interest. The interest rate a lender charges you depends on how good they believe your credit is — your creditworthiness.
Managing credit card finance charges
Credit cards can be a valuable financial tool. They provide a convenient way to pay for things, feature built in protections for your purchases, and can help you to build a good credit rating. But using credit cards can also cost you money in finance charges and fees.
The easiest way to avoid paying finance charges on credit card purchases is to pay your statement balance in full every month. That way, your account will have a zero balance and no finance charges will be assessed. If you’re unable to pay off your entire balance, you can save on finance charges another way by paying off the debt as quickly as possible. Pay as much as possible, whenever possible, but pay at least the minimum amount as indicated on your statement.
Pay on time every time and do not exceed your credit limit. Some credit card issuers will charge a default rate (a higher rate of interest) if a cardholder misses two minimum monthly payments.
Understanding how creditors calculate interest can also help you to manage your costs. Here is information that can help:
When you want to determine which credit card will likely cost you the most, the Annual Percentage Rate (APR) is a quick way to make a first comparison. The APR takes into account a loan’s interest rate, term, and fees to illustrate the total cost of credit expressed as a yearly rate. The lower the APR, the lower the total cost of the loan. So look for a credit card with the lowest APR you can find. Keep in mind that if a credit card has a variable rate, that means it can change throughout the year. Read your disclosure statement or talk to your lender to make sure you understand the details.
In addition to comparing APRs, look carefully at fees for items such as annual fees, finance charges, late payments, balance transfer fees, over-the-limit, and cash advances to name a few
The periodic rate is the interest rate described in relation to a specific period of time. For example, the monthly periodic rate is the cost of credit per month; the daily periodic rate is the cost of credit per day. If a creditor charges interest on a daily basis, the cost of credit per day is the APR divided by 365. An APR of 18% would therefore equal a Periodic Rate of about 0.05%.
How is your interest calculated? After you know the APR and Periodic Rate, look at the method the creditor uses to calculate the interest you owe. This can make a big difference in how much interest you’ll pay. Here are four common methods:
With this method, no interest is charged if you make payment in full within the grace period defined in your card member agreement (usually 25–28 days). If you don’t pay in full, interest is charged on the unpaid amount, and then added to your next bill.
This is the most common method used. Your credit card issuer calculates your balance every day in the billing cycle. Each day, they add new charges and subtract payments from your existing balance. They then add all daily balances together and divide by the number of days in the billing cycle to get the average daily balance. Finally, they multiply the average daily balance by the periodic rate to determine the finance charge.
With this method, the average daily balance is calculated from two billing cycles rather than one. The finance charges you pay are typically higher than with the single cycle calculation.
Interest is charged on the opening balance of your account minus any payments made during the billing cycle. Since your new purchases are not included (which would raise your balance) and your payments are included (which lowers your balance), this means that you’ll usually pay less in interest than you would with other methods.
With this method, the card issuer charges interest on the opening balance of your account. They don’t subtract any payments received during the billing cycle. This means that you’ll pay more interest compared to the Adjusted Balance method, but less than you would with either of the Average Daily Balance methods.
For more information on Credit Card Regulations, please visit www.federalreserve.gov/consumerinfo/consumercredit.htm.
what does it really cost?
This example shows how to save money on interest. Let’s say you purchased a new laptop for $500 with a credit card. Review this chart to see what you’ll really pay when using a credit card with a lower interest rate, and one with a higher interest rate.
Compare a $500 purchase on 2 cards with different interest rates
|Credit Card Options||Interest Rate (APR)||Pay Within (Months)||Total Paid||Total Paid|
|Credit Card A||8%||12||$40||$540|
|Credit Card B||18%||12||$90||$590|
It definitely pays to get a credit card with a low interest rate, and to pay your balance in full every month – or as quickly as you can. Why? Each month, the credit card company will send you a bill, or statement, showing the amount you’ve borrowed. If you pay off purchases by paying your first credit card statement in full, you’ll pay no interest, plus you’ll have your full credit limit available to use again; but if you decide to repay over time, you’ll be charged interest on the unpaid balance each month (the amount you still owe). When you pay interest on top of your charges, you end up spending more than you would have if you only used cash.
It’s a good idea to shop around for the credit card. Comparing the two examples above, you see that the card with the lower interest rate would save you $50. Seeing how the difference in the interest rate affects the total amount of interest each customer paid.
When comparing credit cards, look at the annual percentage rate (APR). The APR, expressed as a yearly rate, is the total of cost including the loan’s interest rate, term, and fees. The lower the APR, the lower the total cost of borrowing.
card safety tips
Here are some security tips for using credit, debit, and ATM cards safely:
- Report lost or stolen cards immediately to the company that issued you the card.
- To help you respond quickly in case your cards or ID are lost or stolen, make a chart like this one. Be sure to store the list in a safe place. Never carry it with you.
- Sign your card on the signature panel as soon as you receive it.
- Protect your cards as if they were cash. Be mindful whenever you use your cards.
- Do not include your card number in an email.
- Do not give out your card number over the phone unless you initiated the call.
- Be sure that you get your card back after every purchase.
- Don’t leave your credit cards in your car.
- Don’t lend your cards — credit, debit, or ATM — to anyone. You are responsible for their use. Don’t let your credit cards be used by others, even family and friends.
- Always make sure that sales vouchers and receipts are accurate.
- Keep copies of your receipts and compare to your billing statement to make sure the purchase amounts are correct and to ensure there are no suspicious charges. Contact your service provider immediately if you see a charge you don’t recognize.
- Always put disputes regarding your billing statements in writing immediately upon becoming aware of the disputed item; otherwise, you may be held legally responsible for the entire amount of the disputed item. Many credit card issuers have specific instructions for notifying them of a billing error dispute. Read your credit card agreement and billing statements carefully for information regarding dispute notification requirements. You may also contact your credit card issuer to ask about their dispute notification requirements.
- If you receive a replacement card, destroy your old card. Destroy cards for cancelled accounts.
- Shop with merchants you know and trust. Make sure internet purchases are secured with encryption to protect your account information. Look for “secure transaction” symbols.
avoid card missteps
Research shows that many people spend more when they use credit cards instead of cash, so it can be easy to drown yourself with credit card debt before you know it. Have a budget in mind before you spend and don’t spend what you can’t pay back.
Remember, when you use your debit card, the money is deducted directly from your checking account. But with a credit card, you’re borrowing the money. Before you charge, you need to think through how you’re going to repay.
To keep your credit card spending under control, try to start out by selecting just one category to charge at first, like gas or groceries. Don’t add a new category until you’re sure that every month you can repay what you borrow.
Also, try keeping your credit card balance below 30% of your limit and keep your credit card debt low enough so that your required payments are no more than 10% of your monthly income.