Consumer: I often receive offers in the mail for pre-ap-
proved credit cards that promise to save me money. I need a card that allows me to pay my purchases off over time. Is the best offer the one with the lowest interest rate?
Attorney General Rob
McKenna: While a low in-
terest rate is generally favorable, you must also consider other terms and conditions to determine whether an offer will save you money.
In your case, for example, it's important to know what method the credit issuer uses to calculate your finance charge, since that can make a substantial difference in your costs. Fees and benefits also vary widely among credit issuers, so it pays to shop around to find the "best" card for you.
You should also keep in mind that interest rates and monthly payments affect how long it will take to pay off your debt and how much you'll pay over time.
Some terms you should consider:
• Annual Percentage Rate (APR): A measure of the cost of credit, expressed as a yearly rate. Some plans offer a "variable rate" tied to certain economic indicators called indexes; this means that your finance charge may increase or drop without warning. Others offer a "fixed rate," which usually doesn't change. A credit card company must inform you before increasing a fixed APR.
A credit card may have several APRs; those for cash advances and balance transfers often are higher than the APR for purchases. Your payments are usually applied to the lower interest rate first.
Many creditors offer a low promotional rate for a limited time, after which the APR could be much higher.
You may be required to make purchases to maintain a promotional rate. A low rate for a balance transfer probably won't seem as attractive under those circumstances. Because while your payments are applied to the balance transfer, you are being charged a higher rate for your purchases.
Also, be aware that if you miss a payment deadline, your creditor may raise the APR.
• Grace Period: The time between the date of purchase and when the company starts charging you interest. Without a grace period, a card issuer may impose a finance charge from the date you use your card.
The grace period usually applies only to new purchases. Most credit cards do not give a grace period for cash advances and balance transfers. Instead, interest charges start right away.
If you carried over any part of your balance from the preceding month, you may not have a grace period for new purchases.
• Transaction Fees and Other Charges: Most creditors charge a fee if you don't make a payment on time. You may also be charged a fee for a cash advance, balance transfer or exceeding your credit limit. Some plans charge a flat fee each month even if you don't use the card, but you should be able to get a card without a monthly fee if you have a good credit history. Read the information in your credit card agreement to see if there are other fees and charges.
• Annual Fee: A yearly fee charged for having the card. Annual fees are often associated with cards that offer airline miles and merchandise rewards programs. Consider whether these perks are important to you. If not, look for a card with no annual fee.
• Finance Charge: The dollar amount you pay to use credit. The amount depends in part on your outstanding balance and the APR. Some credit cards have a minimum finance charge.
The method the credit issuer uses to calculate your outstanding balance can make a big difference in your finance charge. Your outstanding balance may be calculated over 1) one billing cycle or two; 2) using the average daily balance, the adjusted balance, or the previous balance, and 3) including or excluding new purchases in the balance.
Consider this scenario: A consumer with a $400 previous balance and $50 in new purchases makes a $300 payment. The card carries an 18 percent APR. Depending on the method used to calculate the balance and finance charge, the consumer's finance charge may be as little as $1.50 or as much as $6.
Washington Attorney General Rob McKenna offers this public service to help consumers avoid fraud and to promote a fair and informed marketplace.