Open-end credit includes bank and department store credit cards, gasoline company cards, home equity lines, 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 laws require that open-end creditors tell you the terms of the credit plan so that you can shop and compare the costs involved.
When you're shopping for an open-end plan, the APR you're quoted represents only the periodic rate that you will be charged, figured on a yearly basis. (For instance, a creditor that charges 1 1/2 percent interest each month would quote you an APR of 18 percent.) Annual membership fees, transaction charges, and points are listed separately; they are not included in the APR. Keep this in mind and compare all the costs involved in the plans, not just the APR.
Creditors must tell you when the 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 twenty-five-day grace period, for example, to pay your balance in full before making you 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 come up with the finance charge. Creditors use a number of different methods to arrive at the balance. Study them carefully; they can affect your finance charge significantly.
For instance, some creditors take the amount you owed at the beginning of the billing cycle and subtract any payments you made during that cycle. Purchases are not counted. This is called the adjusted balance method.
Another is the previous balance method. Creditors simply use the amount owed at the beginning of the billing cycle to come up with 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 in arriving at the daily amounts, and, depending on the plan, new purchases mayor 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 taken into account in figuring the balances, but new purchases mayor may not be included.
Be aware that the amount of the finance charge may 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 APR and other important terms of the plan at that time. Likewise, with a home-equity plan, information must be given to you with an application.
Truth-in-Lending laws do not set the rates or tell the creditor how to calculate finance charges-they only require that the creditor tell you the method that it uses. You should ask for an explanation of terms you don't understand.
