CREDIT [Part 2 of 4]

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Subject: misc.consumers FAQ on credit part 2 of 4
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Archive-name: consumer-credit-faq/part2
Last-modified: 21 Aug 1992


This FAQ (Frequently Asked Questions) list should be a repository of the
canonical "best" answers.  If you know a better answer or a change that
improves an answer, please tell me!  (Use email, please.  Traffic in
this group is high, and I might miss a relevant posted article.)

                      Steve Adams, SPSS, Inc., Chicago, IL, USA
                                                        adams@spss.com

Because this list is quite long, I am posting it in four parts:
    part 1 of 4: detailed contents and introduction
    part 2 of 4: credit cards (this file)
    part 3 of 4: credit cards continued
    part 4 of 4: credit reports
Please read the disclaimers, acknowledgements, and general information
in part 1.  (The most important disclaimer is that I am not a lawyer and
this file is not to be construed as legal advice.)


Some helpful free pamphlets are available from the FRB.  You can write
to Board of Governors of the Federal Reserve System, Publications
Services, MS-138, Washington DC 20551 for these among others:

    - How to File a Consumer Credit Complaint
    - Consumer Handbook to Credit Protection Laws

The phone number is (202) 452-3244 in case they accept phone orders.

See part 1 of this FAQ list to obtain a catalog of FRB publications,
including many on home-equity loans and other home mortgages.


section 1. Credit cards, other cards
====================================

    EDITOR's NOTE:  I rarely use credit cards, but did use them quite
                    a bit in the past.  This information is compiled 
                    from numerous sources, and is as accurate as such
                    information can be. 

    This section tells you about the types of credit cards, and some
    non-credit cards.

Q101. What kinds of cards are there?

    - "bank cards," issued by banks:  Visa, MasterCard, and Discover;

    - "travel and entertainment (T&E) cards" like American Express and
      Diners Club;

    - "house cards" that are good only at the stores of one chain.
      Sears is the biggest one of these, followed by the oil companies
      and phone companies and on down to your local department store.

    T&E cards and national house cards like Sears have the same terms
    and conditions wherever you apply.

    Bank cards are issued by the bank you apply to, which is why terms
    and fees vary widely among banks.  However, MasterCard International
    and Visa U.S.A. Inc. do establish minimum standards and rules.
    Bank cards have some subspecies, described below.

Q102. What is an affinity card?

    An affinity card carries the logo of an organization in addition to
    the emblem of the card.  It is typically a Visa or MasterCard.

    Sometimes card users get frequent-flyer miles or points toward
    merchandise from a catalog.  The organization solicits all its
    members to get cards (or even turns over its mailing list).  In
    return it gets some fraction of the annual fee or of the finance
    charge, or some amount per transaction, or a combination of
    incentives.  Seldom does the organization get much money out of it:
    most of the profits go to the card issuer.

    See section 2, "Good deals, bad deals," for how to evaluate these
    offers.

Q103. Is MasterCard better than Visa, or vice versa?  What about
      American Express, Diners Club, etc.?

    In the U.S., almost any establishment that takes MasterCard takes
    Visa, and vice versa.  In Europe, many establishments take just one
    or the other.  If you're going to be doing all your spending in the
    U.S., you may not want or need both cards.

    American Express, Diners Club, and their kin were originally aimed
    at the more upscale "travel and entertainment" market.  They are
    accepted at many places, though not as many as Visa and MC.  Some
    places don't take MC and Visa but do take American Express or DC.

    I don't have an AmEx card, but someone who does posted a list of the
    benefits he had actually used in a year and concluded that the card
    was worth more money to him than the annual fee.  He cited student
    and non-student discounts for air travel, extra frequent-flyer miles
    for a variety of airlines, and "twofers" at some big-city
    restaurants.  Your benefit will be different if your charging
    patterns are different.

    The best card for you is the one that is accepted where you shop and

    charges you the least amount of money for the services you actually
    use.  (For example, if you always pay off your balance each month,
    you want to make sure you get a card with a grace period but the
    interest rate doesn't matter much.)

Q104. Why does my neighbor's MasterCard or Visa have different rates and
      fees from mine?

    MasterCard and Visa rates are set independently by the banks that
    issue them.  In fact, a given bank may offer several different rate
    and fee schedules.  Sometimes you can pick which one you want; other
    times the bank will offer you a single set of terms with no option,
    even though it offers another customer a different set of terms.
    That's why it's worth shopping around rather than just applying for
    "a MasterCard" or "a Visa."  See section 2, "Good deals, bad deals."

    This is not true of the T&E cards.  One American Express green card
    is like all other American Express green cards in the country.
    (Corporate AmEx cards may vary from individual ones.)

Q105. What is a secured card?

    Secured cards require you to make a bank deposit up front.  The
    limit on the card is usually related to the amount of the bank
    deposit.  The bank has the right to take money from your deposit if
    you don't pay your bill.

    Secured cards are usually sold to people who have credit problems
    and can't get a regular "unsecured" card.  But a secured card from a
    bank may be a good deal for anyone; see section 2, "Good deals, bad
    deals."

    A secured MasterCard or Visa looks just like a regular one, and the
    law ensures that it has all the same consumer protections built in.


Q106. What is a guaranteed card?

    It's another name for a secured card, typically offered through 900
    numbers.  Though technically legal, these are not a good deal for
    the consumer when they carry an application fee or a 900-number
    charge; see section 2, "Good deals, bad deals."

Q107. What is an unsecured card?

    You may not often hear this term.  Technically, a "regular" card is
    unsecured.  This means that the bank can't take specific assets of
    yours if you don't pay the loan, but rather they have to sue you or
    force you into bankruptcy.

Q108. What is a debit card?

    As its name implies, it is not a credit card.  Instead of running up
    a bill for you at the end of the month, the debit card runs down
    your account at the moment the sale is made.  Merchants like these
    because they get instant payment without worrying about bad checks.

    Debit cards are convenient.  But it's a lot more painful to resolve
    a problem if the money is gone from your account (as with a debit
    card) than if it's just numbers on a piece of paper (as with a
    credit card).  And if you lose a debit card, your whole account can
    be cleaned out with no recourse for you.  You decide whether you
    want to take on that risk.

    Consumers in the know don't like debit cards because they give you
    less protection in case of disputes than credit cards do.  (See
    section 5, "Billing errors and overcharges.")

Q109. How does an ATM card differ from a debit card?

    An ATM (automatic teller machine) card is a form of debit card, but
    you use it in a cash machine by punching in your code number.  (In
    common speech, "debit card" means the kind that looks like a credit
    card, where you sign for purchases.)

    The ATM card is a little less dangerous if you lose it, since nobody
    can use it to drain your account without your PIN (personal identi-
    fication number).  Also, most banks limit the amount of cash that
    can be withdrawn every day on an ATM card.  On the other hand a Visa
    or MC debit card lets where a thief clean out your whole account
    with one purchase.

    By the way, some banks are now issuing combined ATM-debit cards.
    Depending on your viewpoint, this gives you the advantages or the
    disadvantages of both.

Q110. Where can I find information about telephone credit cards?

    Subscribe to the newsgroup comp.dcom.telecom and watch for the
    periodic posting on how to use the Telecom archives.  Please don't
    post requests for credit-card information there.

    You should also be aware of hybrid cards like the AT&T Universal
    card (both MasterCard and Visa) and the Ameritech Complete
    MasterCard, which act like regular bank cards but also let you
    charge phone calls.


section 2. Good deals, bad deals
================================

This section guides you to the questions you should ask yourself in
evaluating any credit card before you apply.

Q201. In general, what should I look for in a credit card?

    There are three principal features to the card itself:  interest
    rate, annual fee, and grace period.  By law, all must be disclosed
    at the time you apply.  (They are discussed in the following Qs.)

    Some cards, such as Discover and the new Ameritech Complete Master-
    Card, pay rebates as well.  Some cards offer other features like
    frequent-flyer miles and extended warranties on purchases.  You have

    to decide how much those are worth to you.

    Also important is the pattern of your shopping:  a card that your
    favorite merchants don't honor isn't much good to you.

Q202. Do I want a fixed-rate or floating-rate (variable-rate) card?

    The interest rate is the rate charged on purchases and cash advances
    (generally two different rates).  It can be fixed or floating.
    Fixed rates are not truly fixed, because the banks will change them
    every year or so.  Floating rates are typically a bit lower than
    fixed rates, but fluctuate every month according to the latest
    T-bill sale, or the phase of the moon, or whatever.  If you buy
    something you're expecting to pay off over many months, this makes
    it hard to guess how much finance charge you'll be paying.

    Floating rate and variable rate mean the same thing.

    Years ago, credit-card issuers would quote an interest rate that was
    not directly comparable with other lenders' rates because the method
    of computation was not standard.  Now the law requires lenders to
    quote an Annual Percentage Rate (APR) so that you can compare cards.

    Interest rates are all over the map.  In a recent {Wall Street
    Journal} list, a secured card was as low as 8.0% and an unsecured
    card as low as 10.5%; you may also see interest rates as high as
    21.9%.

Q203. How do annual fees work?

    The annual fee is, well, a fee that the card issuer bills to your
    account annually.  Every year, on the anniversary of the date your
    account was opened, the fee for the coming year is billed to your
    account.  Typical charges are $18-$20 for regular bank cards (about
    $40 for gold bank cards) and anywhere from $35 on up for various
    flavors of T&E cards.  House cards are typically free.

    Many lenders waive the fee the first year to get you to sign up,
    then depend on you to forget a year later that you'll be charged an
    annual renewal fee.  There's nothing shady about this as long as
    it's disclosed up front.

    The AT&T Universal Card no-annual-fee offer has expired.  If you
    don't have an AT&T Universal Card now, you can apply for one but you
    may have to pay an annual fee.  However, AT&T is still inviting some
    people to apply for a no-fee card.

Q204. Can I get the annual fee waived at renewal time?

    Many lenders have "secret" programs in effect where if you ask them
    they will waive the annual fee.  (AT&T confirmed on 19 March 1992
    that it is waiving the fee on its Universal cards for at least some
    customers who ask.)  Some do it only if you charge a certain amount
    per year; others have other criteria.  It certainly can't hurt to
    call just before renewal time and ask.  (If you wait until after the
    fee is already on your statement, your chances aren't as good.)

    Some banks will waive the annual fee if you tell them that you'll go
    elsewhere if you have to pay it.  Others will not.  You may want to
    ask (politely) to talk to a supervisor, since the front-line person
    may not care whether you cancel your card and may not have the
    authority to make concessions.  Don't bluff on this unless you are
    confident you can get a card elsewhere.

    One article in Usenet reported that the author called Citibank to
    cancel his Visa card because of the annual fee.  They would not
    waive the fee but said they would send him a gift certificate for
    the same amount if he kept his card.

Q205. What about application fees?

    These are extremely uncommon.  Though such fees are legal, look long
    and hard at the terms before you agree to pay an application fee,
    even if you are "guaranteed" acceptance.  You can almost certainly
    do better elsewhere.  (See the "900" numbers later in this section.)

Q206. What other fees should I be concerned about?

    Many cards assess an "over-limit fee" if you charge something that
    takes you over your credit limit.  They may or may not allow the
    charge if they assess this fee.  $5-$10 is common.

    Some cards charge a late payment fee in addition to the finance
    charges.  Again, $5-$10 is common.

    Some cards charge a transaction fee for cash advances.  This may be
    a flat amount (around $2), a percentage (1%-2% is common), or a
    combination.  These fees are in addition to the stated interest
    rate, which usually starts accruing as soon as you get the money.

    You have the right under the law to know what all these fees are
    when you apply.

Q207. Why is a grace period important?

    The grace period is the time after the billing date that you have to
    pay off the bill without paying finance charge.  (Grace periods for
    cash advances are pretty rare, since the bank would lose money on
    them.)  T&E cards typically have generous grace periods; bank cards
    usually have 25 days but a few have 30 and many have no grace
    period.  In every case the grace period runs from the date printed
    on the bill, not from the date you get the bill.

    For instance, suppose your bill is prepared on the 28th of every

    month and the grace period is 25 days.  If you make a purchase on
    July 3 it will show up on the July 28 bill and you'll have until
    August 22 (July 28 plus 25 days) to pay it off for free.  If you
    don't pay the full balance, your August bill will show a finance
    charge, and so will every bill after that until you pay off your
    full balance.

    Some banks give you a grace period only in months when your previous
    balance is zero.  Others (fewer of them all the time) give the
    stated grace period on all new purchases even if you have a balance
    from last month.  The second method can save you big bucks; be sure
    to find out how your bank does it when you apply for the card.

Q208. Why is a discount better than a rebate?

    Rebates are a percentage refund on your purchases, either by check
    or by credit to your account.  Discounts actually reduce the price
    on the bill before you pay it.  Discover offers rebates on all
    purchases.  The Ameritech Complete MasterCard gives 10% rebates on
    credit-card calls at the end of the year, where the AT&T Universal
    card gives 10% discounts on credit-card calls.  On the principle
    that it's always better to keep money in your account than to pay it
    out and get some of it back later, discounts are better than rebates
    if the numbers are otherwise equal.

Q209. What else should I watch out for in cards with rebates?

    First, when will the rebate be issued, at the end of the month or at
    the end of the year?  (Typically, it's after the end of the year.)

    Second, how is the rebate calculated?  Be sure to read the fine
    print.  For example, Discover advertises "up to 1%" rebate.  That's
    true; but the fine print shows that you get back 1% of every dollar
    you charge after $3000 a year; the first $3000 is rebated at rates
    between a quarter and three quarters of a percent.  (Confirmed by
    telephone, 1991 Oct 14, and by personal experience.)

Q210. How do I evaluate a secured card?

    Use the same criteria as for any other card.  Ask the bank some
    additional questions:  What interest is paid on the deposit?  If I
    maintain a good credit record, when could I be considered for an
    unsecured card?

    Also ask yourself if you might conceivably have need for the
    deposited funds during the required term.  If so, find out up front
    whether you can withdraw the deposit in case of financial emergency,
    and what it costs in interest and penalties to do that.

    You will want a secured card if you don't qualify for an unsecured
    one but you need credit.

    You may want a secured card even if you could get an unsecured card.
    Why?  Since a secured card represents less risk to the bank,
    interest rates may be lower than for unsecured cards.  (Two recent
    surveys showed an Illinois bank's secured card with a grace period
    and no annual fee that had the lowest interest rate in the surveys.)

Q211. Shouldn't I get as many cards as I can?

    Not necessarily.  The more cards you have, the fatter your wallet is
    and the more cards you have to keep track of.

    See section 7, "Credit bureaus and your credit rating," in part 3 of
    this list, for other reasons why having a lot of cards can be a
    problem.

Q212. Why would I want more than one of the same kind of card?

    Some people like having, say, two MasterCards or two Visas.  I don't
    see the advantages of such an arrangement.  I've heard some people
    say they charge a big-ticket item on one card and pay it off a
    little bit every month, while charging normal purchases to the other
    card and paying them off in full every month.  However, credit-card
    debt is about the most expensive way there is to finance a big item;
    you're almost certainly better off getting a loan from your bank or
    credit union.

    You might want to have a MasterCard and a Visa, or a bank card and a
    T&E card, to be able to charge at places that take one but not the
    other.  In this case, try to schedule the billing dates two weeks
    apart.  (Some card issuers will alter your billing date if you ask.)

Q213. Is a gold card worth the higher annual fee?

    Gold cards typically carry some of these perks:  collision damage
    waiver on auto rentals, travel insurance, extended warranty on
    purchases, roadside assistance, higher credit limits, frequent-flyer
    miles, and of course :-) prestige.

    Many non-gold cards also offer some or all of these.  The AAA offers
    roadside assistance.  Many standard auto insurance policies cover
    the CDW on rentals.  If you have a good record on your existing
    card, you can probably get your credit limit increased by calling
    the issuer.  There's no one answer to whether these cards are worth
    the extra money:  you have to decide what the perks and prestige are
    worth to you, and your neighbor could well come up with a different
    answer.

Q214. I was mailed a solicitation for a Visa or MasterCard that accrues
      frequent-flyer miles on my purchases.  Is this a good thing?


    It may or may not be.  Does the airline fly to places you really
    want to go?  How many dollars must you charge to earn a free ticket?
    Is the airline likely to be around by then?  Are you likely to spend
    more than you otherwise would, just to accumulate the miles?

    Ask yourself questions like these, in addition to all the others
    mentioned in this section.

Q215. I belong to the Benevolent Order of Mumble, and they mailed me a
      credit-card solicitation.  It would be a MasterCard with their
      logo on it.  Is this a good deal?

    This is an affinity card; see section 1, "Credit cards, other
    cards."  Evaluate an affinity card as you would any other.  If you
    would consider it a good deal in the open market, based on the way
    you use credit, then it's a good deal.  But an expensive card
    doesn't become a good deal just because a small fraction of the
    profits are turned back to your organization.  Unless the card is a
    good deal for you personally, it's a better idea to make a direct
    donation to your organization -- and you get a tax deduction too, if
    it's a charity.

216. My bank offered me a deal if I would agree to set up my checking
     account for automatic withdrawal on the due date to pay the credit
     card. Is this a good idea?

    It depends on the specific terms of the deal.  For example, a
    reduced interest rate is meaningless if you pay off every month
    anyway.

    It also depends on your own spending patterns.  If you tend to
    forget to pay your bills on time, this arrangement can save you some
    late charges or finance charges.  On the other hand, if you forget
    to enter the automatic withdrawal in your checkbook you may find
    you're overdrawn and start bouncing checks.

    Some consumers have reported problems with disputed charges being
    paid automatically, or the bank disregarding special requests to
    alter a scheduled payment.  You should weigh carefully this
    additional loss of control over your checking account against the
    benefits promised.

Q217. I got a call (or saw an ad) inviting me to call a 900 number for a
      "guaranteed" MasterCard or Visa.  Is this a good deal?

    No.  These offers require you to pay up front either for a specific
    secured card or (worse) for a list of banks that issue secured
    cards.

    Instead, if you need a secured card, apply to a bank that advertises
    them.  (Citibank in New York started a nationwide program of secured
    cards in late summer 1991.)

    Even better, ask your own bank about getting a secured card there,
    or referring you.  There's no charge for making the inquiry, and I
    have never heard of a bank charging a fee for a direct application.

    Finally, check the published lists (see section 3, "Lists of good
    cards"), and apply directly to banks listed there.

Q218. What should I watch out for in a corporate card?

    A "corporate card" is an ordinary card, typically American Express
    or Diners Club.  However, you don't apply for it.  It is issued to
    certain employees of a company for the company's convenience in
    managing travel expenses.  There are a couple of possible problems.

    First, you may be individually responsible for charges to the card,
    even though you use it only for business purposes.  This can be a
    problem if your company is very slow to reimburse you for expenses.

    Second, some cardholders have posted articles to the effect that
    corporate cards may not have the same buyer protections (like
    extended warranty) that personal cards do.

Q219. I saw an ad for a card I've never heard of.  What's the story?

    Be careful when applying for credit.  Some companies advertise
    credit cards on TV.  The problem is that although the card looks a
    lot like a Visa or MasterCard, it is only good for merchandise from
    the company's own catalog.  Despite the promise of "discount
    prices," you will pay more than you would pay in stores or through
    other mail-order channels.

    Most legitimate catalog companies take Visa, MasterCard, American
    Express, or some combination.  You should always pick merchandise
    for its own qualities, not because you're forced into it by which
    credit card you have.

Q220. I got an application for a card that didn't state interest rate
      and fees.  Is this legal?

    No.  The U.S.  Fair Credit and Charge Card Disclosure Act requires
    issuers of charge or credit cards (including retail stores) to
    reveal certain basic information in tabular form with the applica-
    tion or the "preapproved" solicitation.  This basic information
    includes interest rate (APR), annual fee, and grace period.
    Disclosures must also be provided before annual renewal if the card
    issuer imposes an annual fee.

    Source:  {Consumer Rights} pamphlet, mentioned in part 1 of this FAQ
    list.  If you have a problem, the agency to complain to depends on
    the nature of the card issuer (Federal Savings Bank, National Bank,
    credit union, etc.); see the pamphlet.



section 3. Lists of good cards
==============================

This FAQ list can't tell you which card is best for you.  Your spending
patterns and needs are different from others', and credit-card terms are
constantly changing.  What this section can and will do is give you a
few simple steps to find the information on your own.  Remember to
evaluate any card offer against the criteria in section 2, "Good deals,
bad deals."

Q301. Where are lists of the best cards?

    No one card is best for everyone.  Are you looking for a card with
    no annual fee?  low interest rate?  long grace period?  Do you want
    a secured card?  Lists are published in several places.

    - {Barron's}, an investment weekly, lists low-rate cards, no-fee
      cards, and the biggest card issuers near the back of the "Market
      Laboratory" section of every issue.

    - {Money} Magazine's "Money Scorecard" also carries a brief list of
      inexpensive credit cards, with phone numbers of the issuers.

    - {The Wall Street Journal} publishes a monthly list, lately on
      Friday of the first week of every month.  Look in the index on
      page C1 for "credit card rates."  (The most recent publication
      dates were Monday, 4 May, and Friday, 3 Apr.)

    Many libraries have back issues of some or all of these periodicals.
    Be sure to ask at the reference desk if you don't see them on
    display.

Q302. I don't want to look up magazines.  Isn't there an easier way?

    First, don't post a request to the net.  You may get some replies,
    but typically they'll be for banks out of your area and will be
    missing important information.  Besides, those repeated requests are
    just what this FAQ list is supposed to prevent, and you wouldn't
    want me to look foolish, would you?  :-)

    Fortunately, you can get a list by mail.  Here are your choices,
    from the May 1990 {Consumer Reports}.  (Prices may possibly have
    changed since then.)

    - Bankcard Holders of America, 560 Herndon Parkway suite 120,
      Herndon VA 22070:  send $1.50 for list of 50 "Fair Deal" banks
      (low interest rate on cards) or $1.50 for a separate list of
      no-fee cards.  Phone number: (800) 553-8025 or (703) 481-1110.

    - RAM Research, P O Box 1700, Frederick MD 21701: send $5.00 for
      500-bank "RAM Research Bankcard List" (updated monthly).

    - Consumer Credit Card Rating Service, P O Box 5219, Santa Monica CA
      90405: send $12.00 for "Credit Card Locator," over 100 no-fee
      cards, 200 more with fees under $15, and interest rates on cards
      from 1000 banks.

    Disclaimer:  I have not actually ordered from RAM or CCCRS myself.
    If you have any corrections from experience (not hearsay), please
    email me at adams@spss.com.

Q303. I understand why low rates or no annual fees are important.  Why
      would I care about which banks issue the most cards?

    A bank that issues lots of cards may be less choosy than a bank with
    fewer customers.  If you are expecting problems getting credit, the
    larger bank might be more willing to accept you.

Q304. Okay, I know that First Mumble Bank of Fubar has a card I want to
      apply for.  How do I get in touch?

    First, don't post a request to the net for their phone number.  This
    costs hundreds or thousands of dollars and wastes lots of people's
    time.  You may get the number you want, but it takes a few days, but
    you surely will get some nasty email.

    Quoting from the FAQ in another group:  The network is NOT a free
    resource, although it may look like that to some people.  It is far
    better to spend a few minutes of your own time researching an answer
    rather than broadcast your laziness and/or ineptitude to the net.

    Try (800) 555-1212 (it's free) to find if the bank maintains an 800
    number; many do.  If not, look at the area-code map in the front of
    your phone book to find the area code of the city where the bank is
    located; dial 1, the area code, and 555-1212.  Then call the bank
    and ask for an application.  Alternatively, larger public libraries
    have banking directories and can probably give you the information
    at the reference desk or by phone.

(continued in part 3)
--
 The opinions expressed above are those of the author and not SPSS, Inc.
                        -------------------
     adams@spss.com                           Phone: (312) 329-3522
     Steve Adams                              Fax:   (312) 329-3558

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