Fully understanding all aspects of credit cards is the best way to protect yourself from making mistakes and incurring penalties. One of the easiest ways to improve your credit card knowledge is by brushing up on basic credit card terminology. Here are 15 credit card terms to help you boost your credit knowledge.
Credit Card Terms You Need to Know:
APR, or annual percentage rate, is one of the most critical terms to understand when it comes to credit cards. The APR is the total yearly charge for carrying a balance on a credit card. The APR includes more than just the card’s interest rate; it also ties in fees and other charges.
Average Daily Balance
Average daily balance is one aspect of the APR. The average daily balance is how credit card issuers determine how much a borrower owes in interest. To calculate the average daily balance, add the balance from each day in a statement billing period, and divide by the total number of days in that period.
The grace period is the time from the closing of a credit card’s billing cycle to the due date of the minimum statement balance. The CARD Act of 2009 requires banks to provide a grace period of at least 21 days.
The minimum payment is the smallest amount a cardholder must pay on their credit card balance. Most lenders calculate a minimum payment as one percent of the current statement balance and interest and fees. Failure to pay the minimum payment due will result in late fees and negative credit score impacts.
A credit score is a three-digit number that allows lenders to gauge the creditworthiness of an applicant. The higher the credit score, the more reputable the borrower and the better their approval odds are. Credit scores are calculated by organizations such as FICO and VantageScore, and they are based on various factors like payment history and credit utilization.
Credit utilization is one of the most important factors in calculating a credit score. The credit utilization, or credit usage, refers to the amount of available credit a cardholder uses. Lenders like to see borrowers use 30% or less of credit being used.
A balance transfer is a process of moving one credit card balance to another card. Consumers use these transfers to take advantage of lower interest rates, which end up saving money. Many banks charge a fee for a balance transfer, typically around 5% of the amount migrated.
Cash advances are transactions where a credit cardholder can receive a cash loan from their credit card. These advances are completed through ATM withdrawals or checks from the card issuer. Cash advance limits are typically lower than a user’s overall credit limit and come with additional fees and high interest rates. Interest from a cash advance accrues immediately – there is no grace period – making them costly.
Also known as the prime interest rate, the Prime Rate is the interest rate at which money is borrowed commercially. The Federal Reserve sets the federal funds rate, which the Prime Rate is based on, and is tracked through the Wall Street Journal.
Some credit cards come with a yearly charge for membership. These yearly charges are almost universally known as annual fees. The most common cards to feature an annual fee are rewards credit cards, which offer impressive perks and bonuses in exchange for a fee. Fees vary depending on the credit card, and they can be as low as $50 and range up to several hundreds of dollars.
A credit dispute is the process of raising concerns about an unauthorized transaction on your credit card statement. Credit card charge disputes involve the card issuer and typically must occur within two billing cycles. Most payment networks offer zero fraud liability, protecting consumers from fraud.
A secured credit card is a type of credit card that requires a cash security deposit to open. Because secured cards require a refundable deposit, they are easier to receive than other types of cards for those with poor credit scores or no credit history.
A Schumer Box is a common feature of credit card terms and conditions agreements. A standardized box, the Schumer Box shows all the important credit card terms and figures, including interest rates and fees. Schumer Boxes are named after Charles Schumer, the senator who was the spearhead for the federal Truth in Lending Act.
The full terms and conditions of a credit card that the applicant must agree to before a card is issued. Federal law requires lenders to provide this disclosure. It also serves as a legally binding contract between the card issuer and the cardholder, or lender.
Cardholders can add an authorized user to their credit card account. An authorized user is a person whom the cardholder grants account access to for purchases. Authorized users are not responsible for paying the balance due, however, even though they receive a credit card in their name.
Related Article: How to Understand Credit Card Terms and Conditions