Not knowing the common credit card terms and definitions could lead to you accumulating debt you simply cannot afford.
Having and using credit cards is a big responsibility. They can be a great financial tool when used responsibly, but like so many other financial products, it’s easy to be overwhelmed by all the related jargon that comes with their use.
The good news is that a little bit of research can go a long way in helping you feel more comfortable with the benefits and limitations of your credit card.
- A credit card agreement provides details about everything you need to know about the credit card, its use, and all transaction costs.
- There are less than 20 common credit card terms and personal finance definitions you should know before getting a credit card.
- Credit cards can help in certain situations but can also put you deep into debt, which is why you must do your own research before applying for and using them.
The Most Common Credit Card Terms And Definitions
Each credit card has a credit card agreement. This document provides a breakdown of everything you must know about the credit card, including all fees and interest rates, so you understand what each transaction will cost.
Before applying for a credit card, you should understand these basic terms:
Annual fee: Many credit card companies charge a fee just to have the card. You pay this fee once yearly, or sometimes 1/12th of the full amount monthly.
APR: If you don’t pay your balance in full, the credit card company will charge an annual percentage rate (interest). This is a percentage of your balance and compounds daily until you pay it in full.
Balance: This is the amount you owe. If you started with a $0 balance, it’s the amount you spent, plus any fees, like cash advance fees. If you had a previous balance, your current balance will include interest charges and any other fees.
Billing cycle: Credit card companies must allow at least 21 days between each statement closing date or the last date your purchases will show up on your current bill.
Credit limit: This is the limit of what the credit card company will lend you. If you have a $1,000 credit limit, you can spend up to $1,000 (but shouldn’t).
Grace period: Your new purchases don’t accrue interest during your grace period. This means any purchases made from the last statement’s closing date until the end of the grace period, which must be at least 21 days. After the grace period, your purchases begin accruing interest.
Late payment fee: If you don’t pay by the statement’s due date, you’ll pay a fee, increasing your balance.
Minimum payment: This is the minimum amount you must pay to satisfy your credit card agreement. It’s usually no less than $25, but you should try to pay more if possible.
Other Credit Card Terms And Definitions To Know
The above terms are the most basic terms you should understand before accepting a credit card. The following terms also affect your finances and should play a role in your decision.
Balance transfer: Some credit cards allow a balance transfer from another card. This can help with debt consolidation, especially if the new card has a better APR. Many banks offer a balance transfer introductory APR to encourage you to open a credit card and transfer a balance.
Balance transfer fee: Read the fine print on your credit card agreements. Most credit cards charge you to transfer a balance to a new credit card, usually a percentage of the balance transferred.
Cash advance: Some card issuers allow you to use your credit card at an ATM to take out cash rather than using the credit card for a purchase. The cash advance amount is subject to a cash advance limit, which may differ from your credit limit.
Cash advance APR: Just like your cash advance limit may differ, so will the APR. Most credit card companies have a higher APR for cash advances.
Cash advance fee: Credit card companies that allow cash advances charge a fee. This is in addition to your cash advance APR.
Credit utilization rate: Your credit utilization rate is the percentage of your credit limit you spent. For example, if you have a $1,000 credit limit and spent $500, you have a 50% utilization rate. Your utilization rate should be 30% or less to avoid negatively impacting your credit score.
Foreign transaction fee: If you will use your credit card outside the US, read the fine print. Many credit card companies charge a 3% fee for using your credit card abroad.
Introductory APR: To get more customers, many credit card companies offer an intro APR that may be as low as 0%. This promo rate lasts for a specific amount of time, and then the rate resets to the regular APR.
Penalty APR: If you pay late, the credit card company may reserve the right to increase it to a higher rate. This rate may remain for several months, depending on the terms of the agreement.
Prescreened credit offer: If you receive a pre-approved offer in the mail or via email, it may be a prescreened offer. This means the credit card company did a soft inquiry on your credit report and pre-approved you for the card. You must still apply for the card and shouldn’t react to every offer you receive.
Looking At The Big Picture And Conducting Your Due Diligence
Before applying for a credit card, do your research. Read the fine print for each card to determine the overall cost, especially when a card has an intro APR.
For example, if you choose a credit card with a balance transfer APR, calculate how much you can pay off before the intro APR expires.
More to the point, if you transfer $1,000 and the intro APR is for six months, determine if you can pay the balance off within that time, paying $167 per month.
If not, read the credit card agreement to understand what the interest rate will reset to after that time to ensure it makes sense as a part of your debt consolidation plan.
Final Thoughts On Knowing Common Credit Card Terms And Definitions
Credit cards can help in certain situations but can also put you deep into debt. Understanding the common credit card terms and conditions can help you understand what a card will cost and how it works.
If you get over your head in debt, it’s important to know that you always have options to help fix your financial situation. Ignoring the debt won’t help, but a program to help you get back on track can be the best first step.
At Americor, we understand the importance of managing your finances wisely.
As America’s trusted source for debt relief solutions, we aim to empower you with financial knowledge that can lead to informed decisions, whether it’s about savings, investments, or managing debt.
If your debt has become unmanageable and you have difficulty making your debt payments each month, then you should consider a free consultation call with one of our certified Debt Consultants, who can provide personalized advice tailored to your specific needs.
By taking proactive steps today, you can put an end to your financial stress and work towards a brighter financial future.
Remember, there is always hope for debt relief, and our team of experienced professionals are ready to guide you on your journey to regaining control of your finances.
For more information on Americor’s debt relief services, contact us today to see how we can help you eliminate your debts, and get on the fast-track to becoming completely debt-free!