Cryptic vocabulary makes interpreting credit card contracts difficult. Happily, you will find most of the terms credit card issuers use right here. Refer back to this glossary whenever you need help determining the meaning of creditor jargon.
|1.||Annual fee||8.||Minimum payment|
|2.||Annual percentage rate (APR)||9.||Over-the-limit fee|
|3.||Average daily balance||10.||Payment due date|
|4.||Balance transfer||11.||Periodic rate|
|5.||Cash-advance fee||12.||Previous balance|
|6.||Credit limit||13.||Purchases/new charges|
1. Annual fee — A bank charge imposed each year for use of a credit card. It may also be called a membership or participation fee. It can range from $15 to $300 and usually gets billed directly to the customer’s monthly statement. Many credit cards come without an annual fee.
2. Annual percentage rate, or APR — A yearly interest rate 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 periodic rate and multiplying it by the number of billing periods in a year.
3. Average daily balance — A common calculation method used to determine the payment due. It’s 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.
4. 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. Make sure if you’re making a balance transfer you know exactly when the introductory rate expires.
5. 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.
6. Credit limit — The maximum amount the card allows you to borrow.
7. Finance charge — The charge for using a credit card, comprised of interest costs and other fees.
Read the fine print. You may have different finance charges for cash advances and balance transfers. You may also discover that if you pay off your balance each month, you will escape the finance charge.
Most credit card issuers use the single-cycle average daily balance method to calculate finance charges. Some, however, may use the double-billing cycle.
8. 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 no grace period exists, 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.
9. Introductory rate — Often called the teaser rate, it is the below-market interest rate offered to entice customers to switch credit cards or lenders.
Make sure to pay more attention to the regular APR, which is the interest rate you’ll be stuck with after the introductory rate expires.
10. Preapproved — A credit card offer proclaiming a potential customer is “preapproved” only means that that person passed a preliminary credit screening. A credit card company can still reject the same customer if it doesn’t like the applicant’s credit rating.
To pay down your debt, you’ll want to pay as much of the balance as you can, if not all of it.
11. 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.
The interest rate on secured cards tend to be high — between 13 percent and 24 percent — so shop around if it’s your only card option.
12. Universal default — A policy some lenders apply to credit card users who pay any creditor at least 30 days late. The clause allows the issuer to impose a dramatically higher interest rate. Read the fine print of your contract to see if your lender reserves that right.
13. Variable interest rate — Percentage that a borrower pays for the use of money, and which fluctuates periodically based on changes in an interest rate index.