A Comparison of Credit 

Even when you understand the terms a creditor is offering,

it's easy to underestimate the difference in dollars that

different terms can make. Suppose you're buying a $7,500 car.

You put $1,500 down, and need to borrow $6,000. 

Compare credit with the three credit arrangements in the following.

How do these choices stack up? The answer depends partly

on what you need.

The lowest cost loan is available from Creditor A.

If you were looking for lower monthly payments, you could

get them by paying the loan off over a longer period of time.

However, you would have to pay more in total costs. A loan from

Creditor B--also at a 14 percent APR, but for four years--will

add about $488 to your finance charge.

If that four-year loan were available only from Creditor

C, the APR of 15 percent would add another $145 or so to your

finance charges as compared with Creditor B.

Other terms--such as the size of the down payment--will

also make a difference. Be sure to look at all the terms before

you make your choice.

Cost of Open-end Credit

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 requires 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

told represents only the periodic rate that you will be

charged--figured on a yearly basis. (For instance, a creditor

that charges 1% 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 this 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 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

significantly affect your finance charge.

Some creditors, for instance, 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 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 taken into account in

figuring the balances, but new purchases may or 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 the 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 does not set the rates or tell the

creditor how to calculate finance charges--it only requires

that the creditor tell you the method that it uses. You should

ask for an explanation of any terms you don't understand.

Get Your Own PERSONAL LOAN

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