For those new to credit cards and "old pros" alike, these vital credit card terms can help you avoid unnecessary, costly misunderstandings. The better you understand the terms below, the wiser choices you can make when choosing and using credit cards.
A yearly fee is associated with maintaining a credit card account; not all cards have annual fees. You can shop for credit cards with the desired features without annual fees.
APR (Annual Percentage Rate)
APR (Annual Percentage Rate) is a term used in finance to refer to the annual interest rate charged on loans or credit, including any fees or charges associated with the credit. It provides a standardized way to compare the cost of borrowing money across different lenders and types of loans.
The total amount you owe on your credit card bill.
A balance transfer is a feature offered by credit card companies that allow cardholders to transfer the balance (debt) from one or more credit cards to another, typically with a lower interest rate.
Balance Transfer APR
Refers to the APR, fixed or variable, specific to balances you've transferred onto a credit card.
Balance Transfer Fee
Fee charged when transferring credit card balances from one credit card to another credit card.
A billing cycle is a period between credit card statements, typically lasting around 30 days. During a billing cycle, the credit card company records all transactions made on the card and calculates the balance due. At the end of the billing cycle, the company sends a statement to the cardholder, including the balance due, the minimum payment required, and the due date. The billing cycle restarts after the payment due date.
A cash advance is a feature that allows cardholders to withdraw cash from an ATM or bank using their credit card. Unlike regular purchases with a grace period, cash advances typically have high-interest rates and fees, with interest charged from when you withdraw the cash.
Cash Advance APR
The Cash Advance APR is the annual percentage rate your credit card providers charge for cash advances.
Cash Advance Fee
This fee is separate from the APR and charged for cash advances. Sometimes it is a flat rate, and at other times it is a percentage of the cash "borrowed."
Agencies that gather information about your credit usage and history then report this information to various financial institutions. Experian, Equifax, and TransUnion are examples of credit bureaus.
The maximum amount of money you can charge to a specific credit card.
A credit report is a detailed record of an individual's credit history, including information on their credit accounts, payment history, credit utilization, and any collections or legal actions related to credit. Credit bureaus maintain credit reports, and lenders, credit card companies, and other financial institutions use them to assess an individual's creditworthiness and ability to repay debt.
The information detailed in your credit report is used by lending institutions and credit card companies to calculate a credit score. This score can be between 300 and 850 and is used, by lenders, to determine interest rates, credit "worthiness," and more.
Credit utilization refers to the amount of credit a cardholder has used compared to the total amount of credit available. It is expressed as a percentage and is an essential factor in determining an individual's credit score. Keep your credit utilization below 30% to maintain a good credit score.
The date by which a payment is due to the credit card company. Failing to make "on-time" payments may result in late fees, APR increases, and adverse reports to credit bureaus.
A fixed APR (Annual Percentage Rate) is a type of interest rate that remains the same throughout the life of a credit card or loan. It does not fluctuate based on market conditions or changes in the prime rate.
Foreign Transaction Fee
Fees charged for making purchases outside the United States. It is typically a percentage of the purchase amount. However, some credit cards offer the perk or benefit of "no foreign transaction fees."
A grace period is the time between the date of a credit card purchase and the date the payment is due, during which interest is not charged. It typically lasts around 21-25 days and gives cardholders time to pay off their balance without incurring interest charges.
An introductory APR (Annual Percentage Rate) is a temporary, promotional interest rate that credit card companies offer to attract new cardholders. The introductory APR is typically lower than the card's regular APR and can last for several months or up to a year.
Late Payment Fee
Late payment fees are fees charged by credit card companies when a cardholder fails to make the minimum payment or misses the payment due date. Late payment fees can be significant, typically from $25 to $40, and may increase the cardholder's interest rate.
Refers to the minimum amount credit card companies will accept as payment to keep your account current. Most account statements will include a minimum payment and a balance.
Fee charged if the balance owed on your credit card exceeds your credit limit during the billing cycle.
A penalty APR (Annual Percentage Rate) is a higher interest rate charged by credit card companies as a penalty for specific actions, such as making a late payment, exceeding the credit limit, or having a returned payment. Penalty APRs can be significantly higher than the card's regular APR.
Pre-approval for a credit card is a preliminary determination by a credit card company that a consumer meets specific criteria for a credit card offer. Pre-approval is not a guarantee of approval but rather an initial assessment based on limited information, such as a soft credit inquiry.
The prime rate is the interest rate that commercial banks charge their most creditworthy customers, such as large corporations or government entities, for loans. The prime rate is a benchmark for many types of loans, including credit cards, and can influence the interest rates charged on those loans.
Purchase APR (Annual Percentage Rate) is the interest rate charged on credit card purchases not paid off in full each billing cycle. Purchase APR is the cost of borrowing money from a credit card company.
Credit card companies offer rewards to encourage cardholders to use their credit cards. Rewards can take many forms, such as cash-back, points, miles, or other benefits, which are awarded based on the amount of money spent on the credit card. Cardholders can redeem rewards for various items, such as statement credits, travel, merchandise, or gift cards.
A security code, or a Card Verification Value (CVV), is a security feature for 'card not present' payment card transactions. It is a 3 or 4-digit number not encoded in the magnetic stripe but printed on the card.
The purpose of the code is to verify that a person attempting a purchase has physical possession of the card.
The statement balance on a credit card is the total amount you owe on the card as of your last statement's closing date. It includes all the charges, fees, interest, and payments during the statement period.
A Variable APR is an interest rate on a credit card that can change over time based on changes in an underlying interest rate index (like the U.S. Prime Rate). That means your credit card interest could increase or decrease, affecting the cost of any balance carried on the card.