15 must-know credit card terms
If you don't understand the language,
credit card offers and statements could lead you to deep debt --
or at least furious frustration. For the big scoop on the fine print,
here's what these frequently used credit card terms mean.
Average daily balance -- This is
the method by which most credit cards calculate your payment due.
An average daily balance is determined by adding each day's balance
and then dividing that total by the number of days in a billing
cycle. The average daily balance is then multiplied by a card's
monthly periodic rate, which is calculated by dividing the annual
percentage rate by 12. A card with an annual rate of 18 percent
would have a monthly periodic rate of 1.5 percent. If that card
had a $500 average daily balance it would yield a monthly finance
charge of $7.50.
Annual percentage rate (APR) --
A yearly rate of interest that includes fees and costs paid to acquire
the loan. Lenders are required by law to disclose the APR. The rate
is calculated in a standard way, taking the average compound interest
rate over the term of the loan, so borrowers can compare loans.
Balance transfer -- The process
of moving an unpaid credit card debt from one issuer to another.
Card issuers sometimes offer teaser rates to encourage balance transfers
coming in and balance-transfer fees to discourage them from going
Cash-advance fee --
A charge by the bank for using credit cards to obtain cash. This
fee can be stated in terms of a flat
per-transaction fee or a percentage of the amount of the cash advance.
For example, the fee may be expressed as follows: "2%/$10".
This means that the cash advance fee will be the greater of 2 percent
of the cash advance amount or $10.
The banks may limit the amount that can be charged
to a specific dollar amount. Depending on the bank issuing the card,
the cash advance fee may be deducted directly from the cash advance
at the time the money is received or it may be posted to your bill
as of the day you received the advance. The cost of a cash advance
is also higher because there generally is no grace period. Interest
accrues from the moment the money is withdrawn.
Cardholder agreement -- The written
statement that gives the terms and conditions of a credit card account.
The cardholder agreement is required by Federal Reserve regulations.
It must include the Annual Percentage Rate, the monthly minimum
payment formula, annual fee if applicable, and the cardholder's
rights in billing disputes. Changes in the cardholder agreement
may be made, with written advance notice, at any time by the issuer.
Rules for imposing changes vary from state to state, but the rules
that apply are those of the home state of the issuing bank, not
the home state of the cardholder.
Finance charge -- The charge for
using a credit card, comprised of interest costs and other fees.
Floor -- The minimum rate possible
on a variable-rate loan or line of credit, after any initial introductory
rate period. For example, on a credit card with the Prime rate as
its index, no matter how low the Prime rate drops, the rate on the
line may never decrease below the stated rate floor.
Grace period -- If the credit card
user does not carry a balance, the grace period is the interest-free
time a lender allows between the transaction date and the billing
date. The standard grace period is usually between 20 and 30 days.
If there is no grace period, finance charges will accrue the moment
a purchase is made with the credit card. People who carry a balance
on their credit cards have no grace period.
Minimum payment -- The minimum amount
a cardholder can pay to keep the account from going into default.
Some card issuers will set a high minimum if they are uncertain
of the cardholder's ability to pay. Most card issuers require a
minimum payment of two percent of the outstanding balance.
Over-the-limit fee -- A fee charged
for exceeding the credit limit on the card.
Periodic rate -- The interest rate
described in relation to a specific amount of time. The monthly
periodic rate, for example, is the cost of credit per month; the
daily periodic rate is the cost of credit per day.
-- A credit card offer with "pre-approved"
only means that a potential customer has passed a preliminary credit-information
screening. A credit card company can spurn the customers it invited
with "pre-approved" junk mail if it doesn't like the applicant's
Secured card -- A credit card that
a cardholder secures with a savings deposit to ensure payment of
the outstanding balance if the cardholder defaults on payments.
It is used by people new to credit, or people trying to rebuild
their poor credit ratings.
Teaser rate -- Often called the
introductory rate, it is the below-market interest rate offered
to entice customers to switch credit cards or lenders.
Variable interest rate -- Percentage
that a borrower pays for the use of money, and which moves up or
down periodically based on changes in other interest rates.
For a complete list of credit card terms, check out our glossary.