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					                                             FACT SHEET 4




                                             Choose the Best Credit Card
                                             Interest Rate
                                             Most U.S. consumers use credit cards. But, many don't pay
                                             attention to the interest rate on their credit cards, or to the total
                                             amount of interest they pay every year.
Only 35% of                                  Choosing a credit card with the lowest interest rate can save you
consumers compare                            money. Forty-four percent of all U.S. families had an outstanding
                                             balance on some type of credit card after paying their most recent
offers before                                bill. The median balance for these families was $1900 (in 2001
                                                      2
                                             dollars).
applying for a credit
card and only 58%                            How to find a lower credit card interest rate

review their credit                          Shopping for the best credit card value can be complicated.
       1                                     Different issuers of national bank cards such as VISA, MasterCard,
report.                                      and Discover charge different interest rates. They also use different
                                             methods to calculate finance charges. Under the federal Truth-in-
                                             Lending Act, creditors must disclose the interest rate or the Annual
                                             Percentage Rate (APR). The APR measures the cost of credit as a
                                             yearly interest rate. APRs on credit cards can vary from five to 25
                                             percent.

                                             If you're like most people and carry a balance on your credit card
                                             at least sometimes, the APR can make a big difference. The
                                             following chart shows how much a $2500 balance would cost you
                                             at different APRs if you didn't pay it off right away.

                                             How much you’d pay in finance charges on a $2500
                                             balance after...

                                               APR               6 Months         18 Months         36 Months

                                              19.8%              $245.29          $718.35           $1374.46
                                              14.0%              $171.30          $485.40           $ 874.53
http://www.ace.uiuc.edu/cfe/ccs/index.html     8.0%              $ 96.64          $264.77           $ 448.81
                                                     The effective rate can actually be much higher, depending upon how
    Credit card lists                                the finance charges are calculated. Whether you paid last month's
                                                     balance and whether you have new purchases can both affect your
    You can get lists of credit                      finance charges. The chart on this page compares different methods
    cards with low interest rates                    of figuring finance charges. In the example, the APR is 18% a year, or
    from the group below.                            1.5% a month. Using the various methods, the finance charge could
                                                     be as little as $1.50 or as much as $6.00.
    CardWeb
    P.O. Box1700, Frederick, MD                      In the Previous Balance Method, your finance charge depends on last
    21702; 1-800-344-7714                            month's balance. Payments and purchases you make this month don't
    Publishes a monthly credit                       affect your finance charges. This method can be costly.
    card report for consumers
    and businesses. The report                       Most issuers use the Average Daily Balance Method, including newly
    costs about $5. It’s also on the                 billed purchases, to figure your finance charges. They actually figure
    Web at:                                          your balance every day and average that across the month. New
    http://www.cardweb.com                           purchases increase your finance charges. And, if you carry a balance
                                                     from last month, you don't have a grace period on anything that
                                                     month — you're charged interest from the first day you buy an item.
1
  Hogarth, J.M., Hilgert, M.A., & Schuchardt, J.
(2002, November). Money Managers – The               Some card issuers use the Average Daily Balance Method but exclude
Good, the Bad, and the Lost. Proceedings of
the Association for Financial Counseling and         newly billed purchases. That method would cost you less in months
Planning Education, 12-23.                           when you had new charges.
2
  Aizcorbe, A.M., Kennickell, A.B., & Moore,
K.B. (2003). Recent Changes in U.S. Family           The Adjusted Balance Method takes into account payments you've
Finances: Evidence from the 1998 and 2001
Survey of Consumer Finances. Federal
                                                     made but not new purchases. You’ll often pay the lowest finance
Reserve Bulletin, January, 1-32, retrieved at:       charges with this method.
http://www.federalreserve.gove/pubs/bulletin/2
003/0103lead.pdf.
                                                     Watch out for the "Two Cycle" Average Daily Balance Method. It uses
Written by Susan Taylor, Consumer and
Family Economics Educator, Kankakee
                                                     the total of the average daily balances for two billing cycles and costs
Extension Center, University of Illinois             you more than other average daily balance methods.
Extension, September 1997. Updated 2004.

For more information on credit, see other
Credit Card Smarts fact sheets. A related fact
sheet is “Choose the Best Credit Card.”



    Method Finance                      APR        Previous   New               Payment            Average Daily    Finance
    Charge Figured By:                             Balance    Purchases                            Balance          Charges
    Average Daily Balance               18%        $400       $50 on 19th of    $300 on 15th       $270             $4.05*
    (with new purchases)                                      month             of month
    Average Daily Balance               18%        $400       $50 on 19th of    $300 on 15th       $250             $3.75**
    (without new purchases)                                   month             of month
    Adjusted Balance                    18%        $400       Not applicable    $300               Not applicable   $1.50***
    Previous Balance                    18%        $400       Not applicable    $300               Not applicable   $6.00****

*        [($400 x 15 days) + ($100 x 3 days) + ($150 x 12 days)] divided by 30 days = $270 x 1.5% = $4.05.
**       [($400 x 15 days) + ($100 x 15 days)] divided by 30 days = $250 x 1.5% = $3.75.
***      ($400 - $300) = $100 x 1.5% = $1.50.
****     $400 x 1.5% = $6.00.