Using Revolving Credit

Credit cards serve as a convenient, record-producing method of payment for small purchases like a restaurant meal or clothing and a helpful method of financing more expensive purchases like a vacation or television. Consumers, however, should be aware of the costs of this form of credit.

Credit cards are examples of revolving credit in which an unpaid balance rolls over to the next month and incurs a finance charge. In essence, the cardholder pays a fee for owing the money another 30 days.

The law requires a creditor to tell you its Annual Percentage Rate (APR) and how it calculates the finance charges on the unpaid balance. Because creditors may compute the account balance different ways, however, the actual costs of credit cards with the same APR can vary widely.

The federal Truth in Lending Act requires creditors to inform consumers if the credit card has a free or grace period, and if so, how long. This period is when the cardholder may pay the bill in full and avoid paying finance charges. Beginning at the end of a billing cycle, the grace period is usually between 20 and 25 days.  Some credit cards do not offer a grace period and, in fact, begin applying the finance charge when a purchase is posted to the account. Cash advances from bank credit cards are usually handled in this manner since they are essentially a loan to the cardholder.

Credit cards may also charge an annual fee. Cards with low APRs may have high annual fees and vice versa. Other possible charges include a late payment fee and an over-the-credit-line fee when the cardholder charges over his or her credit limit.

Some cards have a variable-rate provision in which the APR is tied to an interest-rate index. The creditor must give you information on the index, how the creditor determines the rate, and how often the rate can change.

Consumers should consider many factors when selecting a credit card. If a person pays the amount in full each month, having a grace period is more important than the APR. If he or she will be making a payment to the account balance monthly, a low APR and how the balance is calculated are important.

Revolving credit is convenient but can be costly. Read the credit agreement's fine print and compare costs and features before selecting a credit card. You are always entitled to an explanation of charges, fees and rates on any credit card you have.