A credit card is a form of borrowing that often involves charges. Credit terms and conditions affect your overall cost, so it’s wise to compare terms and fees before you agree to open a credit account. The following are some important terms to consider that generally must be disclosed in credit card applications or in solicitations that require no application. You also may want to ask the credit card companies about these terms when you’re shopping for a card.

Annual Percentage Rate
The APR is a measure of the cost of credit, expressed as a yearly rate. It must be disclosed both before you become obligated on the account and also on your monthly account statements. In addition, the card issuer must disclose the "periodic rate" -- the rate applied to your outstanding balance to figure the finance charge for each billing period. Some credit card plans allow the issuer to change your APR when interest rates or other economic indicators -- called indexes -- change. Because the rate change is linked to the index’s performance, these plans are called "variable rate" programs. Rate changes raise or lower the finance charge on your account. If you’re considering a variable rate card, the issuer must also provide various information that discloses to you that the rate may change, and also how the rate is determined. (Which index is used and what additional amount, the "margin," is added to determine your new rate.) And finally, you also must receive information, before you become obligated on the account, about any limitations on how much and how often your rate may change.

Free Period
Also called a "grace period," a free period lets you avoid finance charges by paying your balance in full before the due date. Knowing whether a card gives you a free period is especially important if you plan to pay your account in full each month. Without a free period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account. If your card includes a free period, the issuer must mail your bill at least 14 days before the due date so you’ll have enough time to pay.

Annual Fees
Most issuers charge annual membership or participation fees. They typically range from $25 to $100. "Gold" or "platinum" cards often charge up to $75 or more.

Late-Payment Charge
A charge imposed when your payment is late. If your payment arrives after the grace period, you may be charged both a finance charge (the interest on your outstanding balance) and a late-payment charge. Some card issuers may also impose a penalty rate if you have more than one late payment within several months.

Finance Charge
The dollar amount you pay to use credit. Besides interest costs, the finance charge may include other charges such as cash-advance fees.

Cash-Advance Fee
A fee charged if you obtain a cash advance. This fee is in addition to the interest rate charged on the amount of the advance.

Over-The-Limit Fee
A fee imposed when your charges exceed the credit limit set on your card.

Penalty Rate
The rate that applies under specific circumstances set out by the card issuer. For example, if you make 2 late payments within 6 months, a card issuer may have a policy of raising the interest rate.

Balance Computation Method for the Finance Charge
If you don’t have a free period, or if you expect to pay for purchases over time, it’s important to know what method the issuer uses to calculate your finance charge. This can make a big difference in how much of a finance charge you’ll pay, even if the APR and your buying patterns remain relatively constant. Examples of balance computation methods include the following:

• Average Daily Balance
  This is the most common calculation method. It credits your account from the day payment is received by the issuer. To figure the balance due, the issuer totals the beginning balance for each day in the billing period and subtracts any credits made to your account that day. While new purchases may or may not be added to the balance, depending on your plan, cash advances typically are included. The resulting daily balances are added for the billing cycle. The total is then divided by the number of days in the billing period to get the "average daily balance."
• Adjusted Balance
  This is usually the most advantageous method for card holders. Your balance is determined by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren’t included. This method gives you until the end of the billing cycle to pay a portion of your balance to avoid the interest charges on that amount. Some creditors exclude prior, unpaid finance charges from the previous balance.
• Previous Balance
  This is the amount you owed at the end of the previous billing period. Payments, credits and new purchases during the current billing period are not included. Some creditors also exclude unpaid finance charges.
• Two-cycle Balances
  Issuers sometimes use various methods to calculate your balance that make use of your last two month’s account activity. Read your agreement carefully to find out if your issuer uses this approach and, if so, what specific two-cycle method is used. If you don’t understand how your balance is calculated, ask your card issuer. An explanation must also appear on your billing statements.