Chances are
you've gotten your share of 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. A credit card is a form of borrowing that often involves charges. 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 also 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
statements. 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 bad credit credit
cards 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're considering
variable rate bad credit credit cards, the issuer must also provide various information that discloses
to you: that the rate may change; and how the rate is determined - which index is used and
what additional amount, the "margin," is added to determine your new rate. At the latest, you also
must receive information, before you become obligated on the account, about any limitations on how much
and how often your rate may change. Free Period. 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 bad credit credit cards include 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.
Annual Fees. Most bad credit credit cards 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. Bad credit credit cards 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.
Balance Computation Method for the Finance Charge. If you don't have a free period, or if you expect
to pay for purchases over time, it's important to know what method the issuer uses to calculate your
finance charge. This can make a big difference in how much of a finance charge you'll pay - even if the
APR and your buying patterns remain relatively constant. See page 4 for examples of how the methods can
affect your costs. Examples of balance computation methods include the following. Average
Daily Balance. This is the most common calculation method. It credits your account from the day payment
is received by the issuer. To figure the balance due, the issuer totals the beginning balance for each
day in the billing period and subtracts any credits made to your account that day. While new purchases
may or may not be added to the balance, depending on your plan, cash advances typically are included.
The resulting daily balances are added for the billing cycle. The total is then divided by the number
of days in the billing period to get the "average daily balance." Adjusted Balance. This is usually
the most advantageous method for card holders. Your balance is determined by subtracting payments or
credits received during the current billing period from the balance at the end of the previous billing
period. Purchases made during the billing period aren't included. This method gives you until
the end of the billing cycle to pay a portion of your balance to avoid the interest charges on that amount.
Some bad credit credit cards exclude prior, unpaid finance charges from the previous balance. Previous
Balance. This is the amount you owed at the end of the previous billing period. Payments, credits and
new purchases during the current billing period are not included. Some creditors also exclude unpaid
finance charges. Two-cycle Balances. Issuers sometimes use various methods to calculate your balance
that make use of your last two month's account activity. Read your agreement carefully to find out if
your issuer uses this approach and, if so, what specific two-cycle method is used. If you don't
understand how your balance is calculated, ask your card issuer. An explanation must also appear on your
billing statements. Other Costs and Features Credit terms vary among issuers. When shopping
bad credit credit cards, think about how you plan to use it. If you expect to pay your bills in full
each month, the annual fee and other charges may be more important than the periodic rate and the APR,
if there is a grace period for purchases. However, if you use the cash advance feature, many cards do
not permit a grace period for the amounts due - even if they have a grace period for purchases. So, it
may still be wise to consider the APR and balance computation method. Also, if you plan to pay for purchases
over time, the APR and the balance computation method are definitely major considerations. You'll
probably also want to consider if the credit limit is high enough, how widely the card is accepted, and
the plan's services and features. For example, you may be interested in "affinity cards" - all-purpose
credit cards sponsored by professional organizations, college alumni associations and some members of
the travel industry. An affinity card issuer often donates a portion of the annual fees or charges to
the sponsoring organization, or qualifies you for free travel or other bonuses. Special Delinquency
Rates. Some cards with low rates for on-time payments apply a very high APR if you are late a certain
number of times in any specified time period. These rates sometimes exceed 20 percent. Information about
delinquency rates should be disclosed to you in credit card applications or in solicitations that do
not require an application. Receiving Bad Credit Credit Cards Federal law prohibits issuers
from sending you a card you didn't ask for. However, an issuer can send you a renewal or substitute card
without your request. Issuers also may send you an application or a solicitation, or ask you by phone
if you want a card - and, if you say yes, they may send you one. Cardholder Protections Federal
law protects your use of credit cards. Prompt Credit for Payment. An issuer must credit your account
the day payment is received. The exceptions are if the payment is not made according to the creditor's
requirements, or the delay in crediting your account won't result in a charge. To help avoid finance
charges, follow the issuer's mailing instructions. Payments sent to the wrong address could delay crediting
your account for up to five days. If you misplace your payment envelope, look for the payment address
on your billing statement or call the issuer. Refunds of Credit Balances. When you make a return
or pay more than the total balance at present, you can keep the credit on your account or write your
issuer for a refund - if it's more than a dollar. A refund must be issued within seven business days
of receiving your request. If a credit stays on your account for more than six months, the issuer must
make a good faith effort to send you a refund. Errors on Your Bill. Issuers must follow rules
for promptly correcting billing errors. You'll get a statement outlining these rules when you open an
account and at least once a year. In fact, many issuers include a summary of these rights on your bills.
If you find a mistake on your bill, you can dispute the charge and withhold payment on that amount
while the charge is being investigated. The error might be a charge for the wrong amount, for something
you didn't accept, or for an item that wasn't delivered as agreed. Of course, you still have to pay any
part of the bill that's not in dispute, including finance and other charges. If you decide to
dispute a charge: Write to the creditor at the address indicated on your statement for "billing
inquiries." Include your name, address, account number, and a description of the error. Send your
letter soon. It must reach the creditor within 60 days after the first bill containing the error was
mailed to you. The creditor must acknowledge your complaint in writing within 30 days of receipt,
unless the problem has been resolved. At the latest, the dispute must be resolved within two billing
cycles, but not more than 90 days. Unauthorized Charges. If your card is used without your permission,
you can be held responsible for up to $50 per card. If you report the loss before the card is
used, you can't be held responsible for any unauthorized charges. If a thief uses your card before you
report it missing, the most you'll owe for unauthorized charges is $50. To minimize your liability,
report the loss as soon as possible. Some issuers have 24-hour toll-free telephone numbers to accept
emergency information. It's a good idea to follow-up with a letter to the issuer - include your account
number, the date you noticed your card missing, and the date you reported the loss. Disputes about
Merchandise or Services. You can dispute charges for unsatisfactory goods or services. To do so, you
must: have made the purchase in your home state or within 100 miles of your current billing address.
The charge must be for more than $50. (These limitations don't apply if the seller also is the card issuer
or if a special business relationship exists between the seller and the card issuer.) and, first make
a good faith effort to resolve the dispute with the seller. No special procedures are required to do
so. If these conditions don't apply, you may want to consider filing an action in small claims court.
Shopping Tips Keep these tips in mind when looking for a credit or charge card. Shop around
for the plan that best fits your needs. Make sure you understand a plan's terms before you accept
the card. Hold on to receipts to reconcile charges when your bill arrives. Protect your cards and
account numbers to prevent unauthorized use. Draw a line through blank spaces on charge slips so the
amount can't be changed. Tear up carbons. Keep a record - in a safe place separate from your cards
- of your account numbers, expiration dates and the phone numbers of each issuer to report a loss quickly.
Carry only the cards you think you'll use.
Here is how some different methods of calculating
finance charges affect the cost of credit:
Average Daily Balance (including new purchases)
Average Daily Balance (excluding new purchases) Monthly rate 1 ½% 1 ½% APR 18% 18% Previous
Balance $400 $400 New Purchases $50 on 18th day $50 on 18th day Payments $300 on 15th day (new
balance = $100) $300 on 15th day (new balance = $100) Average Daily Balance $270* $250* Finance
Charge $4.05 (1 ½% x $270) $3.75 (1 ½% x $250)
* To figure average daily balance (including
new purchases): ($400 x 15 days) + ($100 x 3 days) + ($150 x 12 days)/30 days = $270
** To figure
average daily balance (excluding new purchases): ($400 x 15 days) + ($100 x 15 days)/30 days = $250
