Before you apply for a credit card, it’s important that you know the basics. Here’s a break down of the most common credit-related terms, so you can better understand how your card works and avoid the pitfalls (and high costs) that can come when you don’t use your card properly.
A credit card’s annual fee is a yearly charge to the consumer to use the credit card and take advantage of its benefits. Credit card annual fees range from approximately $25–$500 per year depending on the card.
Most consumers try to find a credit card with the benefits they want, but without the annual fee.
Annual Percentage Rate (APR)
The APR is the annual cost of borrowing money on your credit card. A credit card has several APRs, including the APR on purchases, balance transfers, cash advances, and penalties/defaults. The APR on purchases is the interest rate charged after the grace period ends.
A balance is the amount of money you owe on your credit card bill. It can change from month to month depending on whether you pay your bill in full and on time. The balance includes any charges you make, along with accrued interest, late payments, foreign transaction fees, annual fees, cash advances and balance transfers.
A balance transfer is when you take debt from one credit card and move it to a new card with an introductory 0% APR for a set time period, usually six to 21 months. Balance transfers provide you with more time to pay off debt and can save you hundreds of dollars on interest charges. Take note that balances can’t be transferred between cards from the same bank.
Balance transfer APR
This is the interest rate applied to balance transfers and may be greater than the purchase APR. This APR may be variable or fixed.
Balance transfer fee
When you transfer debt from one credit card to another, you’ll often incur a 3% to 5% fee per transfer. Cards may also set $5 or $10 minimum fees.
A billing cycle is the amount of time between the last statement closing date and the next. Billing cycles must be at least 21 days, according to the CARD Act.
When you withdraw money from your credit card account, it’s known as a cash advance. Card issuers typically limit the amount of money you can withdraw to a portion of your total credit limit and charge high interest rates and fees on the withdrawal, making cash advances costly.
The interest rate you incur if you take out a cash advance. This rate is often one of the highest APRs you can be charged. Cash advances incur interest immediately, with no grace period.
When you take out a cash advance, you typically incur a fee: 5% or $10 per advance, whichever is greater.
A credit bureau is an agency that aggregates information about your credit history and reports it to financial institutions and other parties, such as real estate and auto companies. The three main credit bureaus are Experian, Equifax and TransUnion.
The credit limit on a credit card is the most you can spend on your credit card without incurring a penalty. If you have a short credit history and few credit accounts, your credit limit on a credit card will likely be low. If your credit history is longer and you have no blemishes on it, your credit limit could be quite high. Credit card companies may automatically raise your credit limit as time passes, as long as you make your payments on time and use your credit responsibly. If you go over the limit on your credit card, you may have to pay an over-limit fee. The penalty APR may even be triggered on your card. You can opt in and opt out of over-limit charges and associated fees.
A credit report is an aggregation of your credit history. Credit reports include detailed information on credit accounts, such as payment history, balances, account opening date and more. The information from a credit report is summed up in a credit score.
Your credit score is an indicator of how likely it is that you will pay back the money that has been loaned to you. Everything about credit cards affects your credit score, including the number of cards you have (if any), the entirety of your payment history, and other factors associated with your debt history. If you use credit cards, you must use them carefully since your credit score impacts other areas of your life, such as getting a mortgage or a car loan.
Credit utilization rate
Also known as your credit utilization ratio, or CUR, this number is the amount of credit you’re using compared to the amount of credit you have available. So if you have an $800 credit card balance and you have a $2,000 credit card balance, your CUR is 40%:
$800 / $2,000 = 0.4 X 100 = 40%
Experts recommend keeping your utilization rate below 30%.
The due date on your credit card is the date when your minimum payment is due to the credit card company. It is usually due by 5 p.m. on the due date, but some credit card companies may have a deadline that is a little later in the evening. If you don’t make your payment by the due date, you will incur a late fee, an increased APR, and you may be reported to the credit bureaus.
A fixed APR does not change with the prime rate. Card issuers can still change your APR, though they need to notify you prior.
Foreign transaction fee
An additional fee charged for making purchases outside the U.S., typically 3% per transaction.
The grace period on credit card purchases is the time period in which interest is not assessed after a purchase is made. Depending on the credit card, there may only be a grace period on purchases if you do not carry a balance on your credit card. According to the Credit CARD Act of 2009, the grace period must be at least 21 days.
Many credit cards offer introductory APRs that can charge cardholders no interest for a set length of time (usually 12 to 18 months, but up to 21 months). During the intro 0% APR period, you may benefit from no interest on new purchases, balance transfers or both. These offers are a great way to save on interest charges and get out of debt.
Late Payment Fee
If you do not pay at least your minimum payment on your credit card by the due date, you are assessed a late-payment fee. The fee generally will be between $15 and $37 and is based on the size of your balance. For small balances, it is a large percentage of your balance. If you are late making several payments or if one payment is more than 60 days late, your APR will flip over to the penalty rate, which is 27%–30%.
Your credit card minimum payment is the lowest amount you can pay every month while remaining in good standing with your card company. It is usually 1%–3% of your outstanding credit card balance. If you have a relatively low balance on your credit card, you may be assessed a payment that is a percentage of your outstanding balance or $25, whichever is higher.
Paying only the minimum payment on your credit cards is hard on your credit score.
Credit card debt is the most expensive debt you have, and if all you pay each month is the minimum payment, it will take a long time to pay off your bill.
A revolving balance on a credit card is the amount of your credit limit that you have used and not repaid. It is the portion of your credit limit on which you pay interest (APR) every day because you did not pay it off at the end of the previous month. If you pay your credit card balance in full every month, you will not have a revolving balance.
Security Code (CVV)
The security code – or card verification value (CVV) – on your credit or debit card is used primarily for “card-not-present” transactions like online transactions. It is just another level of security to ensure you are the owner of the credit card. It also protects you from credit card skimmers like the kind that are used at gasoline pumps. Since the CVV code is not included on the magnetic strip on the card, a skimmer cannot pick it up. On most credit cards, it is printed to the right of the magnetic strip. On American Express cards, it is on the front of the card.
A printed or online description of all the activity on your credit card account for a given statement’s billing cycle, including transactions, fees, interest charges, payments and credits.
The balance of funds in your account as of your last statement. The balance as of your last statement does not reflect any disputes you may have submitted since your previous statement.
Statement billing cycle
The amount of time between your last statement date and your current statement date. For instance, if your current statement is dated October 1 and your previous statement was dated September 1, there are 30 days in your statement billing cycle.
A request that the bank not pay a check or payment you have written or authorized. Stop-payment orders are generally placed for checks that have been lost or stolen, or in situations where a purchase is disputed. Stop payment orders generally expire after 6 months and a fee is usually charged for this service.
Unsecured credit card
A credit card that is not secured with collateral. A customer may qualify for unsecured credit based on their credit history and financial strength.