Friday, March 07, 2008
The Cost of Credit - Cost of Open-end Credit
Open-end credit includes bank and department store credit cards, gasoline company cards, home equity lines of credit, and check-overdraft accounts that let you write checks for more than your actual balance with the bank. Open-end credit can be used again and again, generally until you reach a certain prearranged borrowing limit. Truth in Lending requires that open-end creditors tell you the terms of the credit plan so that you can shop and compare costs.
When you're shopping for an open-end plan, the APR is only the periodic rate that you will be charged, figured on a yearly basis. (For instance, a creditor that charges 12 percent interest each month would quote you an APR of 18 percent.) Annual membership fees, transaction charges, and points, for example, are listed separately; they are not included in the APR. Keep these fees in mind and compare all the costs involved in the plans, not just the APR.
Creditors must tell you when finance charges begin on your account, so you know how much time you have to pay your bill before a finance charge is added. Creditors may give you a 25-day grace period, for example, to pay your purchase balance in full before you must pay a finance charge.
Creditors also must tell you the method they use to figure the balance on which you pay a finance charge; the interest rate they charge is applied to this balance to compute the finance charge. Creditors use a number of different methods to arrive at the balance. Study them carefully; they can significantly affect your finance charge.
Some creditors, for instance, take the amount you owed at the start of the billing cycle and subtract any payments made during that cycle. New purchases are not counted. This is called the adjusted balance method.
With the previous balance method, creditors simply use the amount owed at the start of the billing cycle to compute the finance charge.
Under one of the most common methods, the average daily balance method, creditors add your balances for each day in the billing cycle and then divide that total by the number of days in the cycle. Payments made during the cycle are subtracted to get the daily amounts, and depending on the plan, new purchases may or may not be included. Under another method, the two-cycle average daily balance method, creditors use the average daily balances for two billing cycles to compute your finance charge. Again, payments will be subtracted to get the balances, but new purchases may or may not be included.
Be aware that the amount of the finance charge will vary considerably depending on the method used, even for the same pattern of purchases and payments.
If you receive a credit card offer or an application, the creditor must give you information about the APR and other important terms of the plan (for example, annual fees and late payment fees) at that time. Likewise, with a home equity line of credit, this information must be given to you with an application.
Truth in Lending does not set the rates or tell the creditor how to calculate finance charges, it requires only that the creditor tell you the method that it uses. You should ask for an explanation of any terms you don't understand.
When you're shopping for an open-end plan, the APR is only the periodic rate that you will be charged, figured on a yearly basis. (For instance, a creditor that charges 12 percent interest each month would quote you an APR of 18 percent.) Annual membership fees, transaction charges, and points, for example, are listed separately; they are not included in the APR. Keep these fees in mind and compare all the costs involved in the plans, not just the APR.
Creditors must tell you when finance charges begin on your account, so you know how much time you have to pay your bill before a finance charge is added. Creditors may give you a 25-day grace period, for example, to pay your purchase balance in full before you must pay a finance charge.
Creditors also must tell you the method they use to figure the balance on which you pay a finance charge; the interest rate they charge is applied to this balance to compute the finance charge. Creditors use a number of different methods to arrive at the balance. Study them carefully; they can significantly affect your finance charge.
Some creditors, for instance, take the amount you owed at the start of the billing cycle and subtract any payments made during that cycle. New purchases are not counted. This is called the adjusted balance method.
With the previous balance method, creditors simply use the amount owed at the start of the billing cycle to compute the finance charge.
Under one of the most common methods, the average daily balance method, creditors add your balances for each day in the billing cycle and then divide that total by the number of days in the cycle. Payments made during the cycle are subtracted to get the daily amounts, and depending on the plan, new purchases may or may not be included. Under another method, the two-cycle average daily balance method, creditors use the average daily balances for two billing cycles to compute your finance charge. Again, payments will be subtracted to get the balances, but new purchases may or may not be included.
Be aware that the amount of the finance charge will vary considerably depending on the method used, even for the same pattern of purchases and payments.
If you receive a credit card offer or an application, the creditor must give you information about the APR and other important terms of the plan (for example, annual fees and late payment fees) at that time. Likewise, with a home equity line of credit, this information must be given to you with an application.
Truth in Lending does not set the rates or tell the creditor how to calculate finance charges, it requires only that the creditor tell you the method that it uses. You should ask for an explanation of any terms you don't understand.
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I've got a question about debt consolidation. What do you think about these programs. I used a lot of cards to start my business seven years ago and used a debt consolidation service. It has been great, but one thing we did was we kept paying our minimums to the card companies so we were making two payments. The consolidation company doesn't like us doing this, but I'm afraid if I don't keep paying the card companies directly, I might take a hit on my credit score. So far no negative reporting has been made. I've always wondered about this decision though and was curious what you thought.
The potential downfall of using consolidation services is that you are placing responsibility for that consolidation service to forward your payment to the lender on time.
So, if subscribe to their service and pay in advance and they in turn submit your payment to the lender late...you can and often will get dinged on your report(s).
Been there...done that.
:-(
My advice is to do it yourself.
Take a look at my post, Get Good Credit Bill Payment Calendar System" listed in my April 2006 archives.
Keep me posted.
aj
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So, if subscribe to their service and pay in advance and they in turn submit your payment to the lender late...you can and often will get dinged on your report(s).
Been there...done that.
:-(
My advice is to do it yourself.
Take a look at my post, Get Good Credit Bill Payment Calendar System" listed in my April 2006 archives.
Keep me posted.
aj
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