If you have and use credit and credit cards, you should know how it all works. Your credit card terms, conditions and benefits use a bunch of terms you probably don’t hear on a daily basis.
If terms like “authorized user” and “finance charges,” for example, sound like Greek to you, read this list to decode the most important definitions for credit card terms.
Your credit score is like your grade point average from back in high school. The credit bureaus use the history from your credit report and calculate a credit score in a range between 300 and 850.
A better credit score can help you qualify for lower interest rates, better credit cards, and might even be the difference between getting approved for a mortgage or not.
Your credit history is a list of your credit accounts, credit limits, balances and payment history for your active and recent credit accounts.
Late payments stay on your credit history for up to seven years and some other credit issues can stay on your credit report for up to a decade. That’s why it can take so long to build credit.
There are three big companies, Equifax, Experian and TransUnion, that track the details from all your lending accounts and compile it into your credit report. This information is then used to create your credit score.
By law, you can get one free copy of your credit report from each credit bureau every 12 months at annualcreditreport.com.
Your credit card balance is the total amount you owe on your credit card. Interest charges are based on your credit card balance. You only get charged interest on your credit card balance if you don’t pay it off in full each month.
Your credit limit is the maximum you are allowed to borrow on a specific credit line, like a credit card.
For example, if you have a $1,000 limit, you are generally not able to put a balance of more than $1,000 on the card. There are some exceptions where you can put more on the card than your credit limit, but they usually come with hefty fees.
Your available credit is your credit limit minus your current balance. This is how much you have left to spend before hitting your limit. For example, if you have a $1,000 credit limit and a $250 balance, your available credit would be $750.
Your available credit updates any time you pay down or pay off your balance, or use your credit card to make an additional purchase.
Your credit utilization ratio gives you the percentage of your credit limit that you’ve used. For example, if you have a $1,000 limit on a credit card and a $250 balance, your credit utilization is 25%. The credit bureaus track this number both on a single credit line and across all your credit lines combined.
This is one of the biggest factors in your credit score. A lower utilization ratio is better for your credit. This ratio also changes over time as you use more or pay down more of your credit account balance.
A balance transfer allows you to move your balance from one credit card to another. This can help if you are moving to a card with a lower interest rate but there may be fees for moving your balance.
The lower interest rate may also only apply for a short time period, so make sure you know what you’re signing up for before transferring your balance to another card.
A cash advance allows you to take cash out from an ATM or bank from your credit card’s line of credit. Cash advance transactions typically incur a fee and a higher interest rate than a regular purchase.
When it comes to credit cards, a grace period is the number of days between the end of your credit card’s billing cycle and the time your payment is due.
By law, you have at minimum 21 days, but some credit card companies may give you more time. For example, if your statement date is October 15th, then your payment due date cannot be before November 5th. This gives you the opportunity to know exactly how much you owe and have time to pay it off before interest charges or late fees apply.
Some lenders also refer to a grace period as a set time after a payment is due during which you can pay your bill without getting charged a late payment fee. Though this second definition of grace period more often applies to loans than to credit cards.
Read your credit account’s terms and conditions to understand what the grace period means and looks like for your line of credit so you can avoid late fees and a negative mark on your credit report.
The minimum payment is the smallest payment you can make on a credit card each month without facing penalties or having a payment reported as late or missed on your credit report. If you pay just the minimum, however, you will 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.
Principal is the portion of your credit card balance that comes from making regular purchases. If you carry a balance on your card from month-to-month, the principal is the portion of what you owe before interest is added.
When you pay your credit card, the payment generally goes towards interest first and then principal, which can make the balance harder to pay down over time.
Terms and conditions are the legal rules for your credit card. Sometimes called “the fine print,” it’s a good idea to give the terms and conditions at least a quick read so you know about any fees, costs and rewards your card has to offer.
A late payment is a payment made after the card’s monthly due date. A late payment generally requires fees and may trigger a higher interest rate. A late payment negatively impacts your credit score. Learn how to remove late payments from your credit report here.
Revolving credit is a term for credit cards and similar credit accounts that allow you to add to the balance, pay it off and add to it again multiple times. This is different than a loan for a set amount of money, that you pay down over time in regular installments until it’s paid off completely.
A secured credit card is a type of credit card account that requires a deposit or down payment, usually equal to the credit limit, to open and maintain an account. Learn how to use a secured credit card to rebuild credit.
Unsecured credit cards are credit cards that allow you to make purchases without any down payment or asset used to secure the account. While the bank can’t go after other assets if you fail to pay as agreed, not paying an unsecured credit card hurts your credit and may result in a heap of fees and charges.
A credit card statement is a monthly document that explains the previous month’s transactions and upcoming payments due, among other key account details. You can get a paper statement in the mail or a digital statement online from most credit card companies.
A billing cycle is a period of time, usually a month, that credit card companies use for billing purposes. All transactions from a billing cycle are added up to calculate your balance, interest and payment due date.
An authorized user is someone added to a credit card account who is not the primary cardholder. This person usually has their own physical credit card tied to the account but is not legally responsible for payments. However, authorized users still see the card show up on their credit report.
A transaction is a technical term for any purchase, payment or other activity on a credit card account.
A cardholder agreement is a legal contract between you and your credit card company that explains how the card works and what your responsibilities are in using it. Signing the cardholder agreement means you agree to use the card and pay it off as outlined in the terms and conditions.
An annual fee is a charge for keeping a credit card open each year. Some cards have no annual fee while others may charge hundreds of dollars or more per year.
When it comes to credit cards, a finance charge, also called interest, is the cost you pay for borrowing money if you don’t pay off your balance in full by the payment due date. Credit cards calculate finance charges differently than loans.
Basically, anything above the principal is a finance charge.
Transaction fees are charges relating to a specific purchase. As a credit card user, these are most common with foreign transactions, cash advances and balance transfers.
Most cards charge a fee for moving a balance from one card to another. This fee is usually a percentage of the balance moved with a minimum fee in many cases. Understand what your fees could look like before you transfer a balance.
When you use your credit card at an ATM or other location to withdraw cash, you usually have to pay an extra cash advance fee as a percentage of the transaction. Most cards have a minimum fee for cash advances.
If you use your card outside of the United States or for a purchase in a foreign currency, a foreign transaction fee of up to a few percentage points may apply.
An over-the-limit fee is a charge for reaching a balance higher than your credit limit. For example, if you have a $1,000 limit and try to make a charge that would put your balance over $1,000, you may be charged an over-the-limit fee, sometimes also called an over-limit fee.
You usually have to opt-in to over-the-limit usage for this to happen, but not always.
An annual percentage rate (APR) is the interest rate charged by a loan, including credit cards. Your APR may vary depending on the card you choose and your credit history. With excellent credit, you may find an APR below 5%. With poor credit, interest rates often reach 30%. If you pay off your balance in full by the due date, you don’t have to pay any interest regardless of the APR.
A fixed interest rate is a type of APR that does not change over time. Your interest rate is locked in per the account’s terms.
Variable interest rates are a type of APR that changes with market conditions. When you read in the news that interest rates are up or down, variable interest rates generally follow. This means your rate can go up or down at any time without notice.
Eric Rosenberg is a former bank manager and corporate finance worker. His work is featured at Business Insider, Credit Karma, The Balance, Investopedia, and many other websites and publications. He has a Bachelor’s degree and a MBA in finance.