Annual Percentage Rate (APR)
A measure of the cost of credit that expresses the finance charge, which includes interest and may also include other charges, as a yearly rate.

Finance Charge
The dollar amount you pay to use credit. Besides interest costs, it may include other charges associated with transactions such as cash advance fees.

Grace Period
A time, about 25 days, during which you can pay your credit card bill without paying a finance charge. Under almost all credit card plans, the grace period only applies if you pay your balance in full each month. It does not apply if you carry a balance forward. Also, the grace period does not apply to cash advances.

Interest Rate
Interest raes on credit card plans change over time. Some are explicitly tied to changes in other interest rates such as the prime rate or the Treasury Bill rate and are called variable rate plans. Others are not explicitly tied to changes in other interest rates and are called fixed rate plans. 

Calculation
of Finance
Charge

With the average daily balance method (the most common method), the issuer calculates the balance by taking the amount of debt you had in your account each day during the period covered by the billing statement and averages it. With the previous balance method, the issuer uses the balance outstanding at the end of the previous period—that is, the period prior to the one covered by the billing statement. With the adjusted balance method, the balance is derived by subtracting the payments you’ve made from the previous balance.

Credit card issuers that offer variable interest rate plans derive the rate to be charged to the consumer by using a formula. Two of the most common formulas are:

Some of the more common indexes used by credit card issuers are the prime rate, the one-, three-, or six-month Treasury Bill rate, the federal funds or Federal Reserve discount rate. Most of these indexes can be found in the money or business section of major newspapers. Once the interest rate corresponding to the index has been identified, the issuer then adds a number of percentage points, the “margin”, to this index rate to calculate the rate charged.

In some cases, the issuer might elect to use another formula to determine the rate to be charged to the consumer. The issuers multiply the index or index plus the margin by another number, “the multiple”, to calculate the rate charged. 

Assumption
In this example, the average monthly balance carried forward equals $2,500, which is about the national average for consumers with credit card debt.

Terms Plan A Plan B Average monthly balance $2,500 $2,500 APR x .18 x .14 Amount paid in finance charges annually $450 $350 Annual Fee + $  20 + $    0 Total Cost $470 $350

In this example, the total possible savings each year achieved by selecting a credit card plan with a lower interest rate and no annual fee is ($470 – $350) $120.

Type of Pricing
F = fixed
V = variable
T = tiered pricing, with different periodic rates applying to different levels of the outstanding balance. The rate shown applies to the lowest of the balance tiers.

Index
The interest rate on variable rate plans is based on an index. The codes shown in the credit card plan list correspond to the following indexes.

1 = prime rate
2 = one-month Treasury bill rate
3 = three-month Treasury bill rate
4 = six-month Treasury bill rate
5 = one-year Treasury bill rate
6 = federal funds rate
7 = cost of funds
8 = Federal Reserve discount rate
9 = other

Grace Period
Indicates that no finance charge will be imposed for credit extended on purchases if payment in full is received by the payment due date after the end of the billing period in which the purchase was made. Generally, a grace period allows customers to avoid finance charges on purchases if they always pay their credit card bill in full by the due date of the bill. Grace periods usually do not apply to cash advances, which begin accruing interest from the day of the transaction.

Other Features
Credit card issuers may automatically add en-hancements or other features in the plan without charging extra fees. Enhancements can include cash rebates, purchase protections, warranty guarantees, travel accident or automobile rental insurance, discounts on goods and services purchased, and usage incentives such as frequent flyer miles.

1	=	rebates on purchases
2	=	extension of manufacturer’s warranty
3	=	purchase protection/security
4	=	travel accident insurance
5	=	travel related discounts
6	=	automobile rental insurance
7	=	nontravel related goods or services
8	=	credit card registration
9	=	reduced introductory interest rate available
10	=	other (not specified)
N.R.	=	not reported

 

Credit Card

General