|Chances are you've gotten your share of "pre-approved" credit card offers in
the mail, some with low introductory rates and other perks. Many of these
solicitations urge you to accept "before the offer expires." Before you accept,
shop around to get the best deal.
Types of Credit Accounts
Credit grantors generally issue three types of accounts. The basic terms of these
account agreements are:
- Revolving Agreement
A consumer pays in full each month or chooses to make a partial
payment based on the outstanding balance. Department stores,
gas and oil companies, and banks typically issue credit cards based
on a revolving credit plan.
- Charge Agreement
A consumer promises to pay the full balance each month, so the
borrower does not have to pay interest charges. Charge cards,
not credit cards, and charge accounts with local businesses often
require repayment on this basis.
- Installment Agreement
A consumer signs a contract to repay a fixed amount of credit
in equal payments over a specific period of time. Automobiles,
furniture, and major appliances often are financed this way.
Personal loans usually are paid back in installments, too.
Credit Card Terms
A credit card is a form of borrowing that involves various charges and/or fees.
Credit terms and conditions affect your overall cost. So it's wise to compare
terms and fees before you agree to open a credit or charge card account.
The following are some important terms to consider that generally must be
disclosed in credit card applications or in solicitations that require no application.
You may want to ask about these terms when you're shopping for a card.
Annual Percentage Rate
The APR is a measure of the cost of credit, expressed as a yearly rate. It also must
be disclosed before you become obligated on the account and on your account
The card issuer also must disclose the "periodic rate" -- the rate applied to your
outstanding balance to figure the finance charge for each billing period.
Some credit card plans allow the issuer to change your APR when interest rates or
other economic indicators -- called indexes -- change. Because the rate change is
linked to the index's performance, these plans are called "variable rate" programs.
Rate changes raise or lower the finance charge on your account. If you are
considering a variable rate card, the issuer must also provide information that
- That the rate may change;
- How the rate is determined;
- Which index is used;
- And what additional amount, is added to determine your new rate.
Before you become obligated on the account, you also must receive information
about any limitations on how much and how often your rate may change.
Also called a "grace period," a free period lets you avoid finance charges by paying
your balance in full before the due date. Knowing whether a card gives you a free
period is especially important if you plan to pay your account in full each month.
Without a free period, the card issuer may impose a finance charge from the date
you use your card or from the date each transaction is posted to your account.
If your card includes a free period, the issuer must mail your bill at least 14 days
before the due date so you'll have enough time to pay.
Most issuers charge annual membership or participation fees. They often range
from $25 to $50, sometimes up to $100; "gold" or "platinum" cards often charge
up to $75 and sometimes up to several hundred dollars.
Transaction Fees and Other Charges
A card may include other costs. Some issuers charge a fee if you use the card to
get a cash advance, make a late payment, or exceed your credit limit. Some
charge a monthly fee whether or not you use the card.