In this post, we want to explain some important credit card terms that every credit card owner should understand.
Because most of these terms are not in everyday English usage it is very easy to misunderstand them.
Terms such as APR are very important terms that need to be understood before the credit card company starts charging you interest.
You don’t want to wake up one day and discover the 10% APR on your credit card debt is not actually the simple interest you thought it was.
One does not need to have a thorough knowledge of these terms but basic knowledge is necessary.
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Table of Contents
Credit Card Terms Explained
Below are some of the most import credit card terms that you need to know.
1. Credit limit
This is the available credit on your card.
For example, if your account says your credit limit is $1,000 then it means you can only spend up to $1,000.
If for any reason you end up exceeding this limit you will be charged some fees.
2. Available credit
Available credit is the amount that is available for you to spend.
It is based on the credit limit less the current balance less any pending transactions.
3. APR(Annual Percentage Rate)
The Annual Percentage is the rate of interest you will pay if you did not clear your balances every.
In other words, if you clear your balance every month you will only pay interest on the period in question.
Actually there are cards that promise no interest if you clear your balance before the end of the month.
However, if your card is not like this then you will pay interest over the period that balance has been owed.
4. Annual fee
This is the fee that credit card companies charge yearly for premium cards.
These cards offer some additional benefits than ordinary credit cards.
Examples include airline cards.
5. Authorized user
An authorized user is a person who has permission from the main cardholder to use a credit card.
The authorized is free to pay for anything using the card in their name as if it was his own.
However, the authorized user is not responsible for repaying the balance.
That responsibility still falls on the main cardholder.
6. Balance Transfer credit cards
This is when you get a new credit card and transfer balances from another credit card or cards to this card.
This is usually done to take advantage of lower interest rates.
In some cases, you may have a zero interest rate for a period on the new card.
This way you avoid interest you would have paid had you stayed with the old credit cards.
The balance transfer, however, depends on the available limit on the new card.
I would recommend to anyone struggling to pay their credit card debt is to consider this option as a way of getting rid of credit card debt in the long run.
7. Grace Period
Many credit card providers provide a grace period for your repayments.
Grace period is the time within which you can clear your balance each month without suffering some finance charges such as interest.
If you miss this period then your balance will incur the agreed finance charges. In some countries, the grace period is a legal requirement.
8. Secured Card
These are usually credit cards for people with poor credit rating and want to improve it.
They secure this card amount by offering a refundable deposit covering the credit limit in full or partially.
The issuer keeps the deposit and will apply it to your balance if you miss the repayments.
At the end of the agreed period, you can cancel the account and you will get your amount. Most credit cards are not secured cards.
9. Variable Interest Rate
A variable interest is the interest rate that changes with the rate of the index rate such as the Prime Rate.
An example of a variable interest rate is where your credit card says your interest will be Prime Rate + 5%.
Therefore if your bank prime rate is currently 10% then your variable interest rate will be 15% i.e. prime interest rate 10% plus 5%.
Each bank has its own prime rate but others will use the rate Federal reserve rate.
The difference between the Prime Rate and your credit card rate is called margin.
Credit cards will either use a fixed rate of interest or variable interest rate. Most credit cards interest rate is usually higher than the Prime Rate.
10. Prime Rate
Prime rate or prime lending rate is the rate that banks chance their most creditworthy customers usually corporate customers.
The prime rate is usually the basis from which the banks determine the variable interest rate to charge other customers.
For example, the bank may charge the Annual Percentage Rate (APR) as Prime rate +5%.
Therefore if the prime rate is 10% at a particular period then the APR is 15% i.e. prime rate 10% + 5%.
This rate will go down or up depending on the prime rate. Therefore it goes down to 7% then the APR will be 12% i.e. 7% plus 5%.
11. Revolving Credit
This is the kind of credit such as credit card which allows a customer to pay all or part of the outstanding balance.
Your commitment is to make sure that you are within the limit and in the case of credit cards to pay at least the minimum amount required.
Most companies have this kind of credit where they are allowed to make payments within that limit.
12. Dispute
This is when a credit card holder disputes a transaction on his or her credit card statement.
Credit cardholders have to do this within 60 days of receiving the statement in which the error occurred.
Once the credit cardholder does this the issuer is required to acknowledge receipt of the complaint within 30 days.
They are then required to correct the error or explain why they think the statement is alright no later than 90 days after receipt of the complaint.
If they don’t do this the cardholder can report the matter to the Federal Trade Commission.
The card issuer is also required by law not to collect a charge on the disputed amount while they are still investigating.
13. Bottom line
The bottom refers to your monthly earnings less your expenses.
14. Adverse credit
This refers to a situation where a person or organization has a low credit score resulting from previous poor management of debt.
This poor management of debt could include, defaults, etc.
All these negative payment information will be on the Credit report of credit cardholder.
15. Cash Advance
This is when you withdraw cash from an ATM using your credit card.
Since you are using a credit card you will pay this back with interest.
It is not a wise decision to do this unless you are really in need of cash.
16. Chip and PIN
This is the four-digit number you are given to allow you to spend on your credit card.
The use of a four-digit PIN to verify a purchase is new in America as there was use of signatures to authenticate purchases.
It was a different thing in Europe where they have been using chip and PIN authentication for a long time.
17. Default
Credit card default happens when fail to abide by the terms and conditions of your credit card.
It includes among other things, failure to make your repayments on time or exceeding your credit limit.
If this happens the issuer might charge you a default fee or in very severe cases can take you to court to force you to pay.
18. Foreign transaction fee/ Foreign Purchase fee
This is the fee that most credit cards charge for using your credit while abroad. It is usually 3 percent for each transaction made abroad
19. Minimum monthly payment
This is the amount that you need to repay your credit card provider every month to avoid late fees and charges.
It is usually 1% of your balance.
I would recommend that you avoid paying only the minimum amount as the balance is still liable for interest.
Therefore the more you do this the more interest you will pay that year. Only do this when you are really facing some cash flow problems.
Otherwise, it makes no sense to have funds and not repay more than the minimum amount.
This is because even if your cash is in a savings account, the interest on savings accounts is usually lower than credit card interest.
20. Oustanding balance
This is the amount you owe your credit card provider.
21. Payment due date.
This is the day by which you are supposed to pay at least your minimum monthly payment.
Failure to meet this deadline will mean that you will be charged penalties.
It is therefore important to be aware of your payment due dates to avoid these penalties.
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Conclusion
I hope you have learned one or two things about important credit card terms. You should now be comfortable with reading your credit card statement and your terms and conditions.
Before I finish let me say that while there may be occasions when you will need to use a credit card you better try to avoid using it. There are actually certain expenses that should never be paid by credit card. Expenses such as mortgages or other loans.
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