21 Credit Card Terms You Need To Know
If your credit cards seem like a mystery to you, it’s time to get educated on how they work. The best way to do so is to understand the many terms associated with a credit card, the words you probably glaze over when reading the paperwork to sign up for one, or on your monthly statements.
Here are 21 credit terms you need to know that will help you make more informed decisions — and possibly accrue less debt.
Annual Fee
When you open a new credit card, many of them charge a once yearly fee (hence, annual) that enables you to utilize the card’s specific benefits. This fee can range from $25 to $500, depending on the kind of card and the kinds of benefits you get access to, according to The Balance.
Annual Percentage Rate (APR)
Your annual percentage rate refers to the interest rate you will be charged every time you don’t pay off your full credit card balance during each billing cycle, according to CNBC. There are multiple kinds of APRs (which we’ll discuss in a bit), but it’s important to know this information up front so you can determine how much extra you’ll be paying if you carry a balance.
Balance
Your credit card balance is the amount of money you owe on your current billing statement, according to Investopedia. If you carried over a balance from one month to the next, this will reflect not only the purchases you put on the card, but the interest you accrued.
Balance Transfer
Sometimes, to take advantage of a better interest rate or other perks, people transfer their existing credit card debt to a new card, according to CNBC. This is called a balance transfer. This can give you time to pay down debt by saving on interest charges.
Cash Advance
Not only can you use a credit card to buy goods and services, you can also “buy” cash — essentially taking out a cash loan through your credit card, according to NerdWallet. Just like with any loan or anything you put on your credit card, you must pay this back, and if it takes more than a billing cycle to do so, you’ll start accruing interest, too. Your credit card also will likely charge you a cash advance fee.
Credit Bureau
A credit bureau, or credit reporting agency, is an organization that gathers and analyzes credit information about individuals and sells that to creditors to help them decide if they will give loans or grant credit to a borrower, according to Investopedia. This is how an individual’s credit score is determined, based on data such as how much debt you carry, your income, and your history of late payments.
Interest Rate
This is an important rate for credit card holders to know — your interest rate is a percentage of money you owe when you don’t pay your credit card balance in full. It is determined by multiplying the interest rate by how much your current debt balance is. For example, according to WalletHub, at a 20% interest rate, for a $500 balance, you will owe an addition $100 in interest in a year.
Credit Limit
While a credit card offers you the opportunity to buy things now with the promise of paying for it later, or over time, there’s still a limit on how much you can spend, according to NerdWallet. Each card comes with a credit limit, and your limit is often determined by key factors such as: credit score, payment history (whether you’ve made late payments, etc.), how much debt you’re carrying at any given time and other factors.
Credit Utilization Rate
How much of your credit limit you use at any given time is a key factor in determining your credit score. NerdWallet recommends utilizing no more than 30% of your credit limit to stay under the radar, and 10% is even better.
Credit Report
A credit report is an analysis of your credit history summed up in one report. Credit reports include detailed information on credit accounts, such as payment history, amount of total debt, and more. The information on a credit report translates to a credit score.
Credit Score
The all-important credit score can seem like an arbitrary number if you don’t know how it’s created. This score is important for things like taking out any kind of loan (home, car, education) and can even be requested as part of your employment process in some states. Your credit score is determined by a set of factors, such as: number of credit cards you hold, total debt, repayment history and more. Lenders decide if they want to lend to you partially based on this score.
Card Verification Value (CVV) Security Code
A credit card security code (CSC) or card verification value (CVV) is a 3- or 4-digit number printed on all major credit cards (Visa, Mastercard, American Express and Discover) as a form of security, according to WalletHub. When you pay for something with your card, you give your CVV/CSC code that is sent to your credit card company for authentication. If the code is inaccurate, the transaction will not go through. This prevents potential fraud if someone only has your card number.
Fixed APR
A fixed-rate APR or fixed APR is one that stays consistent within given parameters, such as a time frame, or a contract period, according to the Consumer Financial Protection Bureau. Be aware that this doesn’t mean your interest rate will never vary, but that you must be notified before a change, and the higher rate will typically apply only to purchases after you receive notice.
Foreign Transaction Fee
Should you use your credit card to purchase something electronically in a foreign country, you will likely have to pay a foreign transaction fee, as it may cost your credit card company money to pay a foreign institution, according to Investopedia. You can expect the fee to fall between 1% and 3% of the purchase value.
Grace Period
For a brief time after you purchase something on a credit card, if you do not carry a balance, there is a congressionally mandated grace period in which no interest is added to your account. According to the Credit CARD Act of 2009, which established this law, you must receive at least 21 days, according to The Balance.
Introductory APR
To entice you to open an account, credit card holders will often offer an introductory APR, which can be zero or as low as a few percentage points, according to CreditCards.com. This rate will also be temporary, usually ranging from between six and 18 months. During this period you will accrue little to no interest on purchases. However, be careful to mark when it ends, as the regular interest rate will kick in thereafter, and could come as an unpleasant surprise.
Late Payment Fee
If you make your credit card payment later than the due date on your bill, or less than the minimum amount, you can be charged a late payment fee. However, you can only legally be charged up to $29 the first time, or $40 for additional late payments as of 2020, according to the Truth in Lending Rule.
Minimum Payment
Though you may have a debt balance of several hundreds or thousands of dollars on your credit card, your credit card provider only requires you to pay a percentage of your bill each month, known as a minimum payment. Keep in mind that this is to the credit card’s advantage, as they earn interest, while your debt accrues. Experts agree it’s better to pay more than the minimum payment to get ahead of interest you will accrue.
Prime Rate
The prime rate is the interest rate established by the Federal Reserve to set a baseline for lenders when they set interest rates on things like credit cards and loans, according to Experian. The current prime, as of April, 2022 rate is 3.50%.
Revolving Balance
Whatever balance on your credit card that you haven’t paid at the end of a billing cycle is known as your revolving balance. Revolving simply means it changes, but doesn’t completely go away, because you continue to make payments instead of paying it off all at once. With a revolving balance, you pay interest on whatever debt remains on the card.
Variable APR
In contrast to a fixed APR, which remains the same, a variable APR can change with the prime rate, going up or down in relation to that figure. With a variable APR, your rate is tied to the prime rate’s rise and fall.
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