A Comparison

A Comparison


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 the
three credit arrangements on the next page.

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 then 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
checkoverdraft 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.