20 Definitions for the most common credit card terms

By Carrie Smith

Your personal credit is key to building wealth and reaching the financial freedom you crave. On the flip side, it could be the one thing that’s holding you back from those goals. A large part of being successful with your money is learning to manage and use credit cards responsibly, and with that comes the need to fully understand how credit cards work. Here are 20 definitions of the most common credit card terms you need to know.

Annual Fee

In order to use a particular credit card, many financial institutions require a yearly fee to paid. This annual fee is the cost of owning a credit card and being able to access various perks and benefits. Not all credit cards come with an annual fee though, so be sure to read the fine print before applying.

Annual Percentage Rate (APR)

The APR attached to your credit card is also known as the annual percentage rate at which you pay interest on any outstanding credit card balance. The APR is used to calculate a number of finance charges that will post to your account if your balance isn't paid in full by the due date.

Balance

The balance in your checking or savings account is the amount of money you have accessible for spending. Regarding a credit card, balance is the amount you owe based on transactions you swiped or purchased, throughout the month.

Balance Transfer

When performing a balance transfer, you’re moving any unpaid credit card balance from one financial institution to another. This can be initiated from an electronic transfer performed within your credit card account, over the phone, or via a balance transfer check. Usually, a balance transfer will come with a promotion of a lesser interest rate, sometimes even 0%, for a specified amount of months.

Credit Bureau

A credit bureau is a reporting agency that collects all information related to your personal credit usage. Anytime you pay a bill, make a purchase, or are late on a credit card payment, your information is transferred to one of the main credit bureaus. There are currently three main credit bureaus within the United States: Equifax, Experian, and TransUnion.

Credit History

Your credit history is a complete picture of your financial life over the past few years, or however long you’ve used credit. Also known as your credit rating, your credit history tells financial companies and loan issuers important information about how you handle money. It showcases whether or not you pay bills on time, how much debt you carry and other creditors you’ve worked with in the past.

Credit Line

A credit line is the maximum amount of money that can be charged to your credit card account. It’s also known as a credit limit, line of credit or spending limit. With an unsecured credit card, your credit limit is determined by your credit history and your credit score. If you’re applying for a secured credit card, your spending limit directly correlates to the amount you use for a deposit on your account.

Credit Score

Everyone has their own personal credit score. This is a numerical number, from 0-850 that represents your level of creditworthiness. The main factors used in determining your credit score include total credit limit, mix of credit accounts, amounts owed and other factors. After taking your credit history and credit score into account, the credit card issuer will decide whether to approve you for that card.

Credit Utilization Ratio

Your credit utilization ratio compares the amount of credit used to make purchases or balance transfers, against the total amount of credit limit that’s available. So if you have a $1,000 credit card limit and your current balance is $500, your credit utilization ratio is 50% or half of the credit limit available. Experts recommend keeping a credit utilization ratio of less than 30% to ensure a healthy credit rating.

Finance Charge

You’ll pay a finance charge when you don’t pay off the entire balance of your credit card every month. This fee is based on your current interest rate multiplied by the balance owed every day the amount is unpaid.

Fixed Interest Rate

A fixed interest rate is an APR that remains unchanged. If your credit card company decides to change the fixed interest rate, they will have to contact you in writing before doing so.

Grace Period

The main appeal of using credit cards is that you’ll receive a small grace period from when you make the credit card purchases, to when the bill becomes due. This allows you to make purchases without having the cash to pay them off right away before any interest accumulates. Most credit card issuers have a grace period of 15-30 days.

Introductory Rate

Some credit card companies offer special introductory interest rates to incentivize you to sign up for their credit card, or use a balance transfer promotion. Most introductory rates are low, or even 0%, and are valid for a specific period of months. Once the promotion ends, the introductory interest rate will expire and your balance will be subject to the regular interest rate again.

Minimum Payment

The minimum payment on your credit card statement is the lowest amount of money you must pay to keep your account in good standing. Usually, the minimum payment is about 2% of the entire balance on your credit card. To avoid incurring late payment fees and putting your account in default, you must pay the minimum amount due.

Principal

The principal balance on your credit card account is the base amount of your purchases before any interest charges are applied. The goal is to pay off your principal balance as much as possible, so you aren’t charged any interest fees.

Over-the-limit Fee

This is a fee that’s charged to your account if you make purchases that go over your credit card’s spending limit. Going back to our first example, if your credit limit is $1,000 and you make purchases that total $1,100, you’ll be charged an over-the-limit fee. The exact amount will be listed in the credit card company’s terms and conditions fine print.

Terms and Conditions

Speaking of terms and conditions, this is a document you’ll receive when applying and being approved for a new credit card. This details the credit card’s terms, fees, interest rates, and other conditions of the contractual agreement. When you swipe your first purchase, you’re formally agreeing to the terms and conditions that come with that particular credit card.

Transaction Fee

Transaction fees cover a wide variety of various fees and interest rates for certain activities related to your credit card account. This includes fees for foreign transactions, withdrawing cash from an ATM and late payments. All of these transaction fees, plus others, will be individually spelled out in the terms and conditions paperwork.

Variable Interest Rate

Unlike a fixed interest rate, a variable interest rate is constantly changing. This interest rate varies based on what’s happening with the economy, your personal credit history, and various other factors. The goal is to secure a fixed interest rate, so you don’t have to worry about your rate changing without warning.

This breakdown of the basic credit card terminology is by no means conclusive, but it details the most common definitions for terms you’ll encounter when managing your credit card account.

About the Author

Carrie Smith is a personal-finance writer, who has also written for Student Loan Hero.

Written on October 31, 2016

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