Understand all the in's and out's of credit cards and the definitions of all the key terms you need to know.
The Top Line
- If you hope to use your credit card responsibly and to its full potential, then you need to be familiar with various credit card terms.
- Knowing credit card terms will help you not only use your credit cards effectively but also protect you while using them.
- You should always read the terms and conditions of your credit card to ensure that you have a full understanding of what you are agreeing to when you open a credit card.
Credit Card Terms to Know
To help you understand credit cards better and know what you are getting yourself into when you open a credit card, we have defined several key terms that you will want to know to be safe when using your credit card.
An annual fee is the amount that you have to pay to keep the line of credit open on an annual basis. This can vary from under $100 to well over $400 a year. It typically depends on the number of benefits that come with the card.
Annual percentage rate (APR)
Your APR is the interest rate that you will be paying on the money that you borrow through the credit card.
Refers to an individual that you can designate and authorize for use on your card. Card holders can have many authorized users. Authorized users generally do not have administrative privileges.
Auto rental collision damage waiver
This is a benefit from some credit cards which provides protection while renting a car using the credit card. Typically, your own auto insurance provides the first line of coverage for when you rent a car, but some credit cards provide coverage so that you don’t need to use your personal auto insurance with a rental car. More often, credit cards may cover the deductible if you make a claim with your auto insurance company.
This refers to the amount of money that you have available for credit. It is the amount that you can spend before reaching the limit on the money you can charge on the credit card.
Average daily balance
This is a metric provided by some cards that tells you how much credit you have on the card on a daily basis, on average.
Your balance is the amount that you currently owe to the credit card company.
If you wish to transfer your balance, you can in some cases. If you have other accounts with the bank or you want to put the balance on a different credit card, that would be a balance transfer.
Balance transfer APR
This refers to the new interest rate that you will be paying after the balance transfer is complete.
Balance transfer fee
This is the amount that you will pay when you conduct a balance transfer, usually implemented by the card that you are transferring the balance from.
This is the length of time that is on one credit card bill. Many credit cards use 30 days.
You will need to sign a cardholder agreement when you open a card. This means that you will be agreeing to all terms and conditions associated with the card.
If you wish to get cash, you can do so by getting a cash advance from your credit card, which you will have to repay back just like any other regular balance on the card. Cash advances are an expensive way to obtain money because you will typically pay a cash advance fee. In addition, interest on cash advances is higher than the interest on purchases, and interest starts to accrue immediately on cash advances whereas there is a grace period before interest accrues on purchases.
Cash advance APR
This is the interest rate that you will pay on the cash advance that you take out from your credit card. It is typically a higher interest rate than the one for purchases.
Cash advance fee
The amount that is charged when you conduct a cash advance, usually a one-time fee.
Cash back rewards
One of the features of some credit cards is that you receive a percentage of your purchases back as a cash credit. Some credit cards offer higher percentages back for purchases in certain categories such as gas, groceries, or office supplies.
A credit bureau is an organization that determines credit score and sets other rules for consumer spending.
Credit card issuer
The credit card issuer is the bank that has issued the credit card. Some well-known ones are Chase and Wells Fargo, but it could be any bank.
This refers to your history using credit and any past payments on past loans that you have taken out.
Your credit limit is the amount that you can spend on credit from any one source.
A credit report is a document that contains all of your borrowing history and helps inform lenders about your trustworthiness as a borrower.
A metric used to gauge your worthiness as a borrower, based on your past history borrowing funds.
Credit utilization ratio
This is calculated as a percentage. It refers to the amount of available credit that you are currently using.
Sometimes in credit card transactions, disputes can happen. This can be brought on by a card holder, merchant, or credit card company.
The amount that it costs to borrow money. This includes fees, interest, and any other costs incurred.
Fixed interest rate
An interest rate that does not change. One that changes is a variable interest rate.
Foreign transaction fee
If you conduct transactions online or in person in other countries, you may be subject to foreign transaction fees on each transaction.
The amount of time that you have after your bill is due to pay it. If you pay during the grace period, you will not pay interest on the purchases. After the grace period, interest starts accruing on the purchases.
The interest rate that you pay when you first open the card. This is likely to change after you have held the card past the introductory period.
A payment that is not made within the specified due date timeframe. Often subjects you to fees.
The minimum amount that is due each month to pay down the balance on your credit card.
Your history of making payments. If you have made any late or missed payments, it is likely to show here.
This is a higher interest rate that you are required to pay if you make a payment 60 or more days late.
The amount that you put down for a large purchase. The amount of the purchase that is not financed.
This is a rate published by the Wall Street Journal, which surveys the 30 largest banks. Banks use the prime rate as a basis for determining the interest rate for credit cards.
The amount of interest that is charged for a purchase.
Refers to a type of debt that does not have a set amount of payments, like a mortgage. This is the type of credit that credit cards are because you may borrow and repay the credit line over and over.
Secured credit card
Credit cards that are secured by upfront funds. Usually, they require a deposit ranging from $100-$400. Great for building credit.
A bonus in points, miles, or cash back that you get for opening up a credit card. This is a promotional offering.
A statement is a document sent to you each month detailing your credit card use and amount due.
Terms and conditions
You will have to agree to the terms and conditions laid out by the lender before you take out a credit card.
Any action on your credit card, such as a purchase, cashback, payment, or cash advance.
This is the amount charged for each transaction. This will vary from card to card.
Unsecured credit card
A credit card that does not require upfront collateral. Most credit cards are unsecured credit cards.
Variable interest rate
An interest rate that is subject to change throughout time due to a variety of factors.
Zero percent APR
A rate, usually promotional, that allows you to borrow money for free. You are charged 0 percent interest on funds borrowed in this manner.