From interest rates to average daily balances: a guide to credit card terms


Here are some common credit card terms:

* Interest rate: Expressed as an annual percentage rate, or APR, this is the rate you will be charged on your unpaid balance. Many rates are "fixed" at a specific level, but issuers can change that rate with 15 days' notice. Increasingly, issuers are using "variable" rates tied to the prime rate.

* Annual fee: The amount customers are charged each year to keep the account open. Some issuers charge no fee.

* Grace period: The number of days between the end of the billing period and the date the balance must be paid in full to avoid interest charges. It is not the number of days between the time your receive the bill and when it is due.

Note: If you did not pay off your bill in full the previous month, you lose the grace period, and interest is calculated from the time of the purchase.

* Minimum payment: Most issuers demand that you pay at least 5 percent of the balance, but some require only 3 percent. Don't consider that a kind gesture, however; the less you pay now, the more interest you'll pay later.

* Late fee: Some issuers charge you for being late with your payment. Some charge a flat fee, while others charge a percentage of the minimum payment.

* Over-the-limit fee: Some issuers charge you if you exceed your credit limit, sometimes for each transaction over the maximum. Some also charge interest on the fees.

* Cash-advance fees: Essentially a loan obtained through a credit card, cash advances are some of the most expensive loans available. Because most issuers charge transaction fees (typically $2 to $10 or 2 percent of the amount borrowed), and interest accrues immediately, consumers can be paying effective interest rates of more than 30 percent, according to Bankcard Holders of America.

* Average daily balance: The Federal Reserve Board describes six ways that issuers can calculate the balance used to determine interest charges. Some use only new purchases, while others exclude them. Some use one billing cycle, while some incorporate two.

The technicalities aside, Bankcard Holders found in one comparison of four common methods that the least expensive method for consumers is an "average daily balance" that excludes new purchases. Issuers could charge nearly three times as much interest by using the "two-cycle" method that includes new purchases, twice as much for a "two-cycle" method that excludes new purchases and twice as much for an average daily balance that includes new purchases. Large issuers using a two-cycle method include Discover.

* Cardholder agreement: This contains the legal terms of your credit card account -- but issuers are not required to provide it until after an account is opened.

Bankcard Holders requested applications and agreements from the top 25 credit card issuers for a recent study, but 18 issuers refused to do so.

Some of the remainder complied only after negotiations with the issuers' executive office.

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