Credit Card Terminology: An A-to-Z Guide

The beauty of having credit cards? It can feel like having an extended arm that helps you reach for life-changing purchases and everyday items alike, and empower your life as a consumer.

That being said, when it comes to credit card terms, you could find yourself swimming in a bunch of jargon that has your head spinning.

If terms like "grace period," "authorized user" and "variable interest rate" sound like another language to you, you’re not alone. These terms are confusing to anyone! That's why we put together this A-to-Z guide for you. We hope you find our glossary of credit card terminology helpful and handy:

Credit Card Terminology

Account Holder

Essentially, this is the person who applied for the credit card. The credit card issuer looks at their credit score and other factors such as their debt-to-income ratio and annual earnings in making the decision on whether to offer them credit. They're thought of as the primary account holder. As such, they are on the hook for making payments on the card.

Let's say two people applied for a credit card for a joint credit card account, the issuer will look at the credit scores, debt-to-income ratio and income of both applicants.

Plus, both account holders on a joint card are equally equally responsible for paying off the card balance. So, in the credit card issuer's eyes, if one user decides not to make payments or is financially unable to, the other user is still responsible for all the charges.

Annual Fee

This is a once-a-year charge for keeping a credit card open. You're usually charged automatically on your anniversary month. For instance, if you opened your credit card account in May, you'll be charged an annual fee every May—so expect this fee to pop up automatically on your billing statement.

Some cards have no annual fee, while others might charge hundreds of dollars or more per year. So why choose a card with an annual fee when no-annual-fee cards exist? Typically, the higher the annual fee, the greater the benefits, rewards and perks.

Annual Percentage Rate (APR)

The interest rate and linked fees a lender charges for a type of credit, including personal loans, auto loans, and credit cards. You can think of an APR as offering a more complete picture of the total cost of financing than the interest rate of the loan by itself.

Your APR might vary, and this depends on a few key factors: the credit card you choose, your credit history, and financial situation. With excellent credit, you might find yourself with a lower APR–think below 14%%. If you have poor credit, on the other hand, your interest rates might go up to 30%.

Credit cards have a grace period, meaning it doesn't rack up interest between your billing statement and the payment due date. That is, as long as you aren't carrying a balance, aren't doing a balance transfer, or are taking a cash advance on your credit card.

Some good news: If you pay off your balance in full by the due date, you won't be charged any interest.

Authorized User

This is someone who has been added to a credit card account who has the privileges of making purchases on the card but aren't legally responsible for making payments. Remember: authorized users aren't the primary cardholder.

Generally, an authorized user has their own physical card. Another perk? Authorized users may still see the card show up on their own credit report. If the primary holder stays on top of current payments and keeps a low credit utilization ratio, it may help boost the authorized user's credit score, too.

Available Credit

Not all credit limits are equal. And the more you spend on your credit card, the less you have available. Your available credit is your credit limit minus your current balance. For example, if you have a $1,000 credit limit and a $250 balance, your available credit would be $750.

Any time you pay down, pay off your balance in full, or make an additional purchase, your available credit gets an update.

Average Daily Balance

Simply put, the average daily balance on your credit card is your card's balance at the end of the day that's then divided by the number of days in the billing cycle for that specific card. Typically, a billing cycle is either 28 or 31 days.

To figure out your daily balance, you tally up the following: the card's balance at day's end; that day's new charges; any payments or credits applied that day; and fees, such as a late fee or foreign transaction fee.

What's more, your credit card issuer might calculate with or without compounding interest, which tacks on interest charges based on the previous day's balance to your new daily balance. In other words, if interest charges don't get folded into your daily balance, you won't pay daily compounding interest.

Credit card issuers have different ways of calculating your average daily balance, so can vary slightly from one card card to another. To calculate your average daily balance, refer to your cardmember agreement.

Balance

The total you owe on your credit card at any given time. When you make a credit credit payment, your balance goes down. It works like this: Make purchases on your card, and your balance goes up. Remember: The interest you pay on your card relies on your credit card balance. You'll only pay interest fees on your credit card if you carry a balance and don't pay it in full each month.

Balance Transfer

A balance transfer is when you move an existing balance from one credit card to another. If you're offered a zero or low-interest introductory rate, this can be a strategic move. That's because you can save on interest fees.

The introductory rate doesn't last forever, and is anywhere from 6 to 21 months. You'll want to pay off the balance before the intro rate ends and the standard rate kicks in, which could be higher than the interest rate on your old card.

Plus, balance transfers usually come with fees. In some cases, a balance transfer might not be financially worthwhile. Do the math to see if the interest fees you save is greater than the balance transfer fee.

Balance Transfer Fee

A fee credit card issuers charge when you move a balance from one card to another. While it can be a flat rate (with a minimum), it's usually a percentage of the balance moved with a minimum fee, and is typically anywhere from 3% to 5% of the balance carried. It's important to know what your fees could shake out to before you transfer a balance.

Bank Account

A type of financial account that's maintained by a financial institution—think brick-and-mortar bank, meaning the bank has branches, credit union, or online-only banks—where you can deposit and take out money, transfer funds between accounts, send money to people, and pay bills. Main types of bank accounts include savings, checking and money market accounts. You can think of them as a one-stop-shop to hold your money.

Your money in bank accounts are protected. Bank accounts from a bank are insured up to $250,000 by the FDIC (Federal Deposit Insurance Company), while bank accounts from a credit union are insured up to $250,000 by the NCUA (National Credit Union Administration).

Billing Cycle

A billing cycle refers to the period of time that credit card companies use to calculate your bill. It's usually around a month, and is either 28 or 31 days. All transactions from a given billing cycle are tallied up to calculate your balance.

Cardholder Agreement

In short, a legally binding contract between you and the credit card company. A cardholder agreement explains how the card works and spells out your obligations, or your end of the bargain, in using the card. It also holds details such as the card's annual percentage rate (APR), fees, and how minimum payments are calculated.

When you sign the cardholder agreement, you are essentially agreeing to the card's terms and conditions and to pay off the balance.

Cash Advance Fee

Need to use your credit card at a bank or ATM to take out cash? If so, you usually have to pay what's known as a cash advance fee. This is a percentage of the transaction. Most cards have a minimum fee for cash advances, which is either a flat fee (with a minimum charge) or anywhere from 3% to 5% of the advance amount.

Checking Account

A type of bank account where you can store and withdraw money, transfer funds between people or other accounts, pay bills, write checks, and buy things with your debit card. Checking accounts are considered "transactional accounts."

In other words, the money stashed in a checking account is intended for daily use and you can access the funds quickly. Checking accounts are not to be confused with savings accounts, where the money is tucked away to use at a later date.

Credit Bureau

This is a company that keeps track and monitors details from all your lending accounts, such as your payments, account balances, when an account was opened, date of last activity, and your credit limit and usage. They are looped in on any debt that goes to collections, liens and foreclosures, and bankruptcies. They also keep track of any hard credit inquiries that take place when you apply for a credit card, loan or other type of financing. Credit bureaus then gather everything into your credit report.

This information is used to calculate your credit score by credit scoring companies such as FICO® and VantageScore®. The big three consumer credit bureaus are Equifax, Experian and TransUnion. By law, you can get a free copy of your credit report from each of the three credit bureaus every 12 months at annualcreditreport.com.

Credit Card Bill

This is part of your credit card statement. A credit card bill includes your purchases, credits, any refunds, balance transfers, cash advances, interest charges, fees, the minimum payment, and the outstanding balance.

This section of your credit card statement will also include your payment due date, statement balance, and the minimum payment due.There's also a box that points out how long it will take to pay off your balance if you only stick to minimum payments. You'll also find your interest rate and interest charge calculation if you do carry a balance on your credit card.

Credit Card Agreement

Here's where you'll find an A-to-Z breakdown of a card issuer's interest rates and charges: the APR for purchases, balance transfers, and cash advances. Plus, fees—think cash advance fees, foreign transaction fees, late payment fees, returned payment fees, and statement copy fees. While it sounds like a dizzying array of numbers, the good news is that credit card agreements are organized in a standardized table—thanks to the 1968 Truth and Lending Act. This table is known as the Schumer Box.

Credit Card Debt

Another way to think of credit card debt is the outstanding balance on your credit card. Credit card is revolving debt, which means you can continue to borrow from it as long as you repay it (at least the minimum payment due) and stay within your credit limit. A gentle reminder: Carrying debt means you'll be hit with interest charges.

Credit Card Issuer

The financial institution, such as a bank or credit union or that provides credit cards. A credit card issuer reviews and approves credit card applications, and creates and maintains accounts. Plus, they set everything from card limits to interest rates and fees.

A credit card issuer is not to be confused with a credit card network, which actually creates the systems that make credit card transactions possible. Major credit card networks are Visa, Mastercard, American Express, and Discover.

Credit History

Your credit history is an ongoing list of your credit accounts, credit limits, balances and payment history for both active and recent credit lines. To build credit, stay on top of your payments, have a solid credit mix, and avoid applying for new credit without a good cause or reason.

Credit Limit

A credit limit is the maximum amount you can borrow on a specific line of credit, like a credit card. Case in point: let's say you have a $500 credit limit. In that case, you're usually not able to put a balance of more than $500 on the card.

You can request an increase on your credit limit, but you typically need to be a cardholder of a credit card for a minimum of three months. Further, while it depends on the credit card issuer, you can usually only request a credit limit increase every six months.

Plus, some cards let you go over your credit limit, but note: this usually may come with hefty fees. Credit card issuers aren't allowed to charge you with more than one over-the-limit fee per billing cycle.

Credit Score

You can think of your credit score as the credit-equivalent of your grade point average back in high school.

The first widely used consumer scoring system was initially devised by FICO® back in 1989. VantageScore®, another popular consumer scoring system created by VantageScore Solutions, was launched in 2006. The credit bureaus use the history from your credit report and both calculate a credit score in the range between 300 and 850.

Alongside other factors, such as your income and debt-to-income ratio, the higher the credit score, the better terms and rates you'll likely qualify for. On the flip side, a not-so-great credit score could mean running into a harder time qualifying for the best interest rates and credit cards. It might even be the difference between getting approved for a credit card, mortgage or car loan or not.

Credit Utilization Ratio

In a nutshell, your credit utilization ratio, or credit usage, is the balances on your cards versus the credit limit on all your cards. In other words, it's a percentage of the credit limit that you've used.

For example, you have a $1,000 limit on your credit card, and a $200 balance. In that case, your credit utilization is 20%. The credit bureaus track this number both on a single credit line and across all your credit lines.

Bottom line: Credit utilization is the second-biggest factor of your credit score. The lower the credit utilization ratio, the better for your credit. This ratio also goes up if you use more of your credit, and goes down as you pay off more of your balance.

Cash Advance

If you're short on funds, and take out cash from an ATM or bank against your credit card's line of credit, this is known as a cash advance. While it can be an easy way to access cash, that convenience comes with a cost. Cash advances typically have a transaction fee and a higher interest rate than a standard credit card purchase.

Debit Card

Debit cards are issued by a financial institution such as a bank or credit union. They're linked to your checking account, and can be used to make purchases. Whenever you make a purchase, you pull from money in the associated checking account. If you go over your balance, you run the risk of being charged an overdraft or non-sufficient funds fee from your bank.

Debit cards are not to be confused with credit cards. Sure, they're both plastic cards that might bear a Visa or Mastercard logo, and they look very much the same and include pretty much the same info.

That being said, a telltale sign is that a debit card will say "debit" somewhere on it, while a credit card will have "credit" on it. While a debit card pulls money from your checking account, a credit card pulls from your line of credit.

Finance Charge

Also more commonly known as interest charge, this is the cost to borrow money if you keep a balance on your credit card. But pay off your balance in full by the payment due date, and you're off the hook for any finance charges.

Financial Institution

A financial institution is a company involved with monetary transactions, such as deposits, savings accounts, money market accounts, auto loans, mortgages, currency exchange, and possibly investments, which is something you spend your money on with the expectation that you might get a financial return. These can include businesses like banks, credit unions, regional banks and online-only banks.

Foreign Transaction Fee

If you've ever traveled outside of the U.S. and used a credit card or for a purchase in a foreign currency, you might've incurred a foreign transaction fee. A foreign transaction fee is usually 1% to 3% of the amount of the purchase.

Grace Period

A grace period is the set time in which your credit card balance isn't accruing interest. In turn, if you pay your balance in full, you won't pay any interest charges. Technically, the grace period is the number of days between the end of your credit card's billing cycle and your payment due date.

A grace period is at least 21 days, but in some cases it's up to 25 days. For example, let's say your statement's closing date is November 15th. In that case, your payment due date cannot be earlier than December 6th. During the grace period, your credit card will not accrue interest.

Keep in mind that if you're carrying a balance from the previous period into the next payment cycle, you lose the grace period. In turn, the interest accrues. Or did you only pay the minimum payment on your previous balance? If so, you lose the grace period on the next statement.

Also worth noting: When some lenders refer to a grace period, they might mean a set time after a payment is due in which you can pay your bill without getting hit with a late payment fee. That being said, this often applies to loans rather than credit cards.

Be sure to carefully look over your credit account's terms and conditions. That way, you can get a clear idea what the grace period means. In turn, you can steer clear from late fees and a negative mark on your credit report.

Late Payment

Make a payment past your card's monthly due date, and it's considered a late payment. A late payment usually means getting hit with fees. Plus, it might trigger a higher interest rate. A late payment may negatively impact your credit score—but if you're a couple days late and get dinged with a late fee, it most likely won't hurt your credit.

Minimum Payment

The smallest payment you can make on a credit card each month without facing penalties—for instance, paying a late fee, or having a payment reported as late or missed on your credit report. However, pay just the minimum, and you'll pay more in interest over time. To avoid interest charges on your credit card, pay your balance off in full—and on time—each month.

Outstanding Credit Card Balance

The total amount you owe on your credit card at any given point. This can change throughout a single day, and hinges on the number of purchases, payments, refunds, other credits like cash back rewards, and other transactions you make. This is also known as the current balance.

Over-the-Limit Fee

Should you run into financial hardship, make a slew of purchases that results in hitting a balance that's higher than your credit limit, you'll get hit with an over-the-limit fee. Depending on the specific credit card, you probably need to opt-in to tap into the over-the-limit usage.

Revolving Credit

Revolving credit is a term for credit cards and similar credit accounts—think a personal line of credit or home equity line of credit (HELOC)—where you are given a credit limit. You are allowed to borrow up to the limit and pay it off. Another way to look at it? You can borrow up to the credit limit, pay it off, then add to the balance multiple times—as long as you pay it down or off.

This is in contrast to installment credit, such as a personal loan. With installment credit, you are given a set amount of money upfront, then pay it down over time in regular installments until it's paid off entirely.

Secured Credit Card

A secured credit card is a type of credit card account that requires either a down payment, usually a deposit in a savings account or certificate of deposit, to open and maintain an account. The deposit or down payment is usually equal to the credit limit.

For instance, if your credit limit is $250, your deposit is also $250. Secured credit cards might also allow the card holder to "graduate" to an unsecured credit card with a higher credit limit after making a series of on-time payments.

If you're new-to-credit or are working on rebuilding your credit, a secured card is usually easier to get than standard, unsecured credit cards. That's because since you are offering a deposit as a form of security, lenders will see you as less risky, and can collect on the deposit should you fall behind and aren't able to keep up with paying off the card balance.

Semi-Secured Credit Card

Also known as a partially secured card, a semi-secured credit card works in a similar fashion to a secured card in that you need to back up the credit limit with a deposit. The main difference is that, unlike a secured credit card, the credit limit can exceed the deposit.

For example, if your deposit is $250, on a secured credit card your credit limit is also $250. On a semi-secured credit card, should your deposit be $250, your credit limit might be $400.

Each credit card issuer has its own policies and ways to gauge the threshold that the credit limit will be secured, before the credit limit kicks over to being unsecured.

For instance, one semi-secured card will feature a $500 credit limit, but only requires a $300 deposit. In that case, $300 of the credit limit is secured, and the other $200 is unsecured.

Statement

You can think of a credit card statement as a monthly at–a-glance document that details the previous billing cycle's transactions, minimum payment due, and any credits, refunds, rewards earned, and fees. Most credit card companies send you a paper statement in the mail. Or if you opt for paperless billing, you'll receive a digital statement online.

Terms and Conditions

This is a fancy way of saying the legal rules and restrictions for your credit card. Also known as "the fine print," it's always a good idea to give the terms and conditions of a card a good, thorough read. That way, you won't get blindsided about any of your card's fees, costs, restrictions, and specifics of the rewards program.

Transaction

A technical term for any type of activity, such as a purchase, payment, or refund, on a credit card account. In turn, credit card transactions happen when you use your credit card to make an online, in-person, or over-the-phone purchase, receive a statement credit, refund, or make a payment.

Transaction Fee

Transaction fees are charges connected to a specific purchase. The most common transaction fees you'll get hit with are with foreign transactions, cash advances and balance transfers. It's always a good idea to see what these fees are. That way, you won't get hit unknowingly with a hefty charge.

Unsecured Credit Card

While it might sound like it, an unsecured credit card doesn't mean a credit card has self-esteem issues. Instead, these cards let you make purchases without a down payment or something of monetary value, like cash in a savings account or a certificate of deposit, to back up or "secure" the account. It's a definite plus that the bank can't go after your valuable assets if you fail to make payments, but not paying an unsecured credit card hurts your credit. Plus, it could mean a heap of fees and charges.

Many credit cards are unsecured. So if a credit card is being advertised as simply a credit card, that means it's unsecured.

Variable Interest Rate

Variable interest rates are a type of annual percentage rate (APR) that is based on an underlying benchmark interest rate or index, and fluctuates accordingly. When there's flashing headlines that interest rates are up or down, variable interest rates usually follow.

Bottom line: Because your variable interest rate is tied to an index, when the index moves up, so can your interest rate. And when the index moves down, your interest rate can follow suit.

About the author

A personal finance writer for over 8 years, Jackie Lam covers money management, lending, insurance, investing, and banking, and personal stories. An AFC® accredited financial coach, she is passionate about helping freelance creatives design money systems on irregular income, gain greater awareness of their money narratives, and overcome mental and emotional blocks.

Her work has appeared in publications such as Bankrate, Time's NextAdvisor, CNET, Forbes, Salon.com, and BuzzFeed. She is the 2022 recipient of Money Management International's Financial Literacy and Education in Communities (FLEC) Award, and a two-time Plutus Awards nominee for Best Freelancer in Personal Finance Media. She lives in Los Angeles where she spends her free time swimming, drumming, and daydreaming about stickers.

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