15 must-know credit card terms
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 out.
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 Interest accrues from the moment the money is withdrawn.
Card holder 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 statement date and the payment-due date. The standard
grace period is usually between 20 and 30 days. If there is no grace period
for new purchases, 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
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.
Pre-approved -- 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 credit rating.
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.
-- Posted: April 6, 2004