Deciphering the Fine Print

The Schumer Box

The Federal Truth in Lending Act requires credit card issuers to display the costs of credit cards in an easy-to-read box format on most applications and solicitations. The Schumer Box that lists the costs of the card is named after Rep. Charles Schumer who led the legislation through Congress.

The Schumer Box gives most important information on the pricing of the credit card offer, which details the card's prevailing annual percentage rate (APR), the grace period before interest is charged, and other fees or penalties. You can usually find the Schumer box on the back of the credit card application.

When you apply online, look for a link titled "Terms & Conditions" or "Disclosures" to find the Schumer Box.

Schumer Box: an Example

Late payment fee: $35 and Overlimit fee: $29. Cash advance FINANCE CHARGE transaction fee: 4% of amount of advance, minimum $5. The variable rate for cash advances will be the higher of (a) 19.8% APR (.05425% daily periodic rate) or (b) LIBOR plus 13.141% (19.8% APR today); see the CONSUMER INFORMATION above for other rate information applicable if you fail to make any payment when due, exceed your credit limit, make a payment on your account which fails to clear and is returned unsatisfied, otherwise default on this or any other account with us, or if your account is closed by you or by us.

Explanation of Terms

1. Annual percentage rate (APR) for purchases
   This is the interest rate you will pay, on an annual basis, if you don’t pay your credit card off every month.
   
   The APR can be fixed or variable.
   
• A fixed rate remains constant until the credit card issuer gives written notice of a change. By federal law, issuers must give consumers 15 days' notice before changing the interest rate on a credit card.
• The variable APR is usually based on an index such as the prime rate plus a certain percentage, and the card issuer may adjust the APR on your account when the prime rate changes. Some of the common indexes are the prime rate; the one-, three- or six-month Treasury bill rate; or the Federal Reserve discount rate.

  Periodic rate
  The interest rate the credit card issuer applies to the outstanding balance to calculate the finance charge for each billing period. The monthly periodic rate is determined by dividing the yearly APR by 12. For example, the monthly periodic rate on an APR of 21.9% is 1.825% (.219 ¡À12 = .01825).

  Cardholders with an outstanding balance on their credit cards can estimate the monthly finance charge by multiplying the periodic rate times the balance. For example, the estimated finance charge on an outstanding balance of $3,000 at 1.825% is $54.75 ($3,000 x .01825 = $54.75). If the consumer makes a payment of $54.75, the interest due is paid but no money is left to apply toward the principal this payment only covers the cost of monthly interest and the loan would never be paid off! If the consumer makes a payment of $60, then $5.25 is applied toward the principal. The result is that it will take the consumer over 11 years to pay off the $3,000 debt that would cost the consumer $8,082 ($3,000 + $5,082 interest).

2. Other APRs
   Addition, higher rates you might pay if you get a cash advance on your credit card, or if you transfer a balance from another credit card, or if the card issuer applies penalty rates. (More information on the penalty rate may be included outside the disclosure box--for example, in a footnote.)
   
   Grace period for repayment of balances for purchases
   Number of days before interest charges start accruing on a purchase, usually 20-25 days.
   
   If the consumer does not pay the entire outstanding new balance due on the previous statement, any new purchases made in the current month will start accruing interest immediately. The consumer forfeits the grace period. If you have an outstanding balance on your credit card at the beginning of the new billing cycle, you will not benefit at all from the grace period. If your goal is to avoid paying finance charges, you must pay off your credit card balance in full each month.
   
   • Method of computing the balance for purchases
   The method that will be used to calculate your outstanding balance if you carry over a balance and will pay a finance charge.
   
   If your credit card plan has no "free" or "grace" period, or if you expect to pay for purchases over time, it is important to know how the card issuer calculates the finance charge. The finance charge, or the dollar amount you pay to use credit, will vary depending upon the method the card issuer uses to figure the balance. The method used can make a difference in the amount of finance charges a consumer will pay even when the APR is identical to that of another card issuer and the pattern of purchases and payments is the same. For consumers who never carry over a balance (always pay the balance in full), the finance charge computation method used by the credit card issuer is not as important as other factors.
   
   There are two basic ways card issuers calculate balances on which finance charges are computed:
   
   Average Daily Balance (including new purchases or excluding new purchases). This method gives the cardholder credit for payment from the day the card issuer receives it. To compute the balance due, the card issuer first totals the beginning balance for each day in the billing period. Next, any payments credited to the account are deducted on the day received. New purchases may or may not be added to the balance, depending on the plan, but cash advances typically are added. The daily balances are summed for the billing cycle and the total is then divided by the number of days in the billing period. The result is the "average daily balance." Note the Schumer box (Figure 1) reveals the most commonly used average daily balance method (including new purchases).
   
   Two-Cycle Average Daily Balance (including new purchases or excluding new purchases). This balance is the sum of the average daily balances for two billing cycles. The first balance is for the current billing cycle, and is figured by adding the outstanding balance (excluding or including new purchases and deducting payments and credits) for each day in the billing cycle, and then dividing by the number of days in the cycle. The second balance is for the preceding billing cycle and is figured in the same way as the first balance. The two-cycle average daily balance is used primarily to back charge interest on a previous balance on which consumers did not pay finance charges (because their balance was zero), but neither did they pay off the current balance due in full. The method affects consumers who always or sometimes carry over a balance.
   
   • Annual fees
   A fee levied by the card issuer for the privilege of having the card whether used or not
   • Most credit card issuers charge annual membership or other participation fees. These fees range from $15 to $35 for most cards and from $50 and higher for some "premium" or "gold" cards. Some institutions still offer "no fee" cards, but these are less common than they used to be. Other institutions waive the fee for the first 12 months, but then bill the cardholder as soon as the second year begins. Still other issuers have a use fee (e.g., $1.75) for each month the card is used, meaning cardholders will pay $21 a year if the card is used monthly
   
   • Minimum finance charge
   A finance charge levied against your card in case you carry a small balance.
   
   • Transaction fee for cash advances.
   • A fee levied for a cash advance
   
   Many issuers charge cash advance fees, which typically amount to between 2% and 3% of the total cash advance. The fee may have a minimum amount, often $2, and a maximum amount, such as $10. Note the Schumer box in Figure 1 reveals the cash advance fee is 2% with a minimum fee of $3.00. The cash advance fee may be assessed for each cash advance taken. A consumer who is charged $5 for $20 in cash is paying a transaction fee equal to 25% of the amount borrowed. Using a credit card to obtain a cash loan is often the most expensive way for consumers to borrow money.
   
   Some issuers charge higher interest rates on cash advances than for purchases. As an example, one card issuer offers a 7.9% APR on purchases made with the credit card, but charges a rate of 21.65% APR on cash advances. Issuers are not required to disclose the cash advance APR rate in solicitations or on applications. However, the information is usually provided in materials sent with the credit card to the applicant. A cash advance can also be obtained with a credit card at a bank or an automated teller machine (ATM) or by using checks linked to a credit card account.
   
   Several card issuers offer cash advances with 25-day grace periods. The transaction fee they charge for the cash advance, however, may be more expensive than simply paying interest from the date of the advance.
   
   In addition, if the cash advance is not paid off in full when due, finance charges are accrued at the cash advance rate beginning on the first day of the new billing cycle until it is paid back. Below is an example of charges that could be imposed for a $200 cash advance that is paid in full when the bill arrives:
   
   Cash Advance Fee = $4 ($200 x .02 = $4)
   Interest for one month = $3 (18% APR ¡À 12 = .015/month; $200 x .015 = $3)
   Total cost of cash advance = $7 ($4 fee + $3 interest = $7)
   
   In comparison, a $200 purchase with a credit card having a grace period would cost nothing if it is paid off promptly in full by billing due date.
   
   • Balance transfer fee
   A fee for transferring balances from one card to another
   
   • Late (payment) fee
   The fee imposed if your payment is late
   
   • Late fees are typically charged when a cardholder fails to make at least the minimum monthly payment by the due date. Some issuers charge a flat late fee, for example, $10. Other issuers charge a fee that is a percentage of the minimum payment due (e.g., 2 to 5%). Note the Schumer box in Figure 1 reveals the late payment fee is $10.
   
   • To avoid late fees, mail payments in plenty of time to arrive before the due date.

Over-the-credit-limit fee

A fee levied if your charges go over the limit allowed by the company

Tips

• A low interest rate is one of the most important factors for a credit card if you are likely to carry a balance from month to month. Beware of low "teaser" rates that will increase after an introductory period. Always know when your rate will increase and what it will increase to. Also, be aware that the rate for cash advances is usually higher than the rate for purchases.
• A grace period is especially important to have if you plan to pay the balance in full each month. It will prevent you from being charged interest if you pay in full and on time.
• Look for an average daily balance (excluding new purchases) method of computing the balance. This will save you money if you carry a balance, but it is hard to find. The average daily balance (including new purchases) is more typical. Be aware that the two-cycle billing method uses the past two months to compute the average balance when you switch from paying in full to carrying a balance.
• There are many credit cards available today that do not charge an annual fee. Sometimes an annual fee is worth paying if you are going to take advantage of special incentives that a card offers (like frequent flier miles or cash back), and you plan to avoid finance charges and fees. However, many consumers end up paying more in annual fees and other charges than the incentive is worth.