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Credit cards: Understand your needs -- and the fine print

Thinking about a new credit card? What should you consider in selecting one?

First, think about how you plan to use the card. Ask yourself when you expect to pay for all that you charge - by the due date each month or over several months? This is a crucial question. Many Americans carry a balance on their credit card and pay interest on it each month. Yet many of these same people chose their card because it has no annual fee, without considering whether they could get a better interest rate on a different card. In the long run, they could pay far more in interest than what they save by not paying an annual fee.

Other people sign up for a card because of cash rebates, bonus points toward airline travel, free T-shirts and other giveaways - but they, too, could end up paying more in fees or interest than the value of their reward.

Generally speaking, if you expect to pay your credit card bill in full each month, your best bet is a card with no annual fee and with the kinds of rebates or rewards that fit your lifestyle. If you don't expect to pay off your card balance in full most months, go for a card with a low interest rate and the right mix of rebates or rewards to justify any fees.

We also strongly recommend that, before you sign up for a card, you carefully review the terms and conditions, including the potential fees or penalties, all of which must be disclosed to you before you incur any charges on the account. These terms, by law, must be easy to spot. For example, the most important terms must be in a specially highlighted box or near the box. Don't overlook them.

"Be realistic about how you plan to use the credit card, and then evaluate whether the likely restrictions and costs are ones you could live with," said Mira Marshall, a Senior Policy Analyst in the FDIC's Division of Supervision and Consumer Protection.

Joni Creamean, an FDIC Senior Consumer Affairs Specialist, agreed.

"It's important to understand what you are committing to before applying for and using the credit card. Once you use the card, you have established a binding contract with the lender and you are obligated to abide by the terms disclosed to you."

Among the key terms and conditions to know: the interest rate and when and how it could change (low introductory "teaser" rates typically only last for six months to a year); the "grace period" (the number of days before the card company starts charging you interest on purchases); and the interest calculation method, which is crucial for consumers who routinely carry a balance on their credit card.

Another term to watch for is a "default rate," which is a higher interest rate that you could be charged if you pay late on this or another credit card, or for other actions that the credit card issuer considers too risky.

FDIC staffers cited various examples of consumers running into problems with new credit cards simply because they didn't take the time to read key details. One consumer whose new credit card came with a zero-percent initial interest rate decided to "write himself a loan" with one of the blank "convenience" checks provided by the card company. Unfortunately, he failed to take note of the fact that the interest rate on that loan was different than what it was for his card - in fact, the loan had an Annual Percentage Rate (APR) of 24 percent, compounded daily.

Another person signed up for a new card every four or five months so she could transfer the balance from an old card and take advantage of the super-low introductory interest rate.

She later discovered that having a lot of credit cards hurt her credit rating, which resulted in a higher interest rate when she applied for a mortgage.

Fortunately, several new disclosures that will soon be required should help consumers when choosing a credit card and managing their card debt. The bankruptcy law passed by Congress in March 2005 includes provisions that go into effect over the next couple of years and require card applications and solicitations to more clearly describe the temporary nature of any introductory interest rate.

Other new disclosures will go out with monthly credit card bills and will, in particular, help consumers understand how much longer they will be in debt if they make only the minimum card payment due.

For more guidance, go to How to Choose and Use a Credit Card on the FDIC Web site at www.fdic.gov/consumers/ consumer/ccc/choose.html or read our card tips in the Spring 2002 FDIC Consumer News online at www.fdic.gov/consumers/ consumer/news/cnfall02/ index.html.

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