It is very easy to get into credit card debt if you do not understand some of the basic credit card terminology. It may sound simple, but understanding just some of the basic credit card terms may help you to use your credit card more wisely and perhaps result in some savings too.
How Credit History Affects Credit Card Status
Credit cards are issued to holders based on past credit history and credit score. In the United States, credit history is recorded by credit reports of three major credit bureaus – Equifax, TransUnion and Experian. Credit scores are calculated on a person’s past history of debt handling and are calculated through factors such as employment, debt to income ratio, outstanding credit card debt and past credit payment history. The higher the credit score a person has will determine better terms, conditions and eligibility for credit. In addition, credit card limits (the amount which you can borrow on a credit card) are determined by credit history and credit scores.
Common Fees and Rates Associated With Credit Cards
Credit cards have a number of fees and rates associated with them. Some fees are unavoidable whereas other fees can be avoided or reduced, if you know how to use your credit card to its maximum potential. Some of the common terms for credit card fees and rates are:
- annual percentage rate (APR) – is the standard yearly interest rate charged on outstanding credit card balances each month. Be aware that some credit cards have an introductory APR rate that then changes to a higher fixed APR after a certain period of time. If the balance of the credit card is paid off in full each month, interest charges can be avoided.
- annual fee – some banks charge a yearly fee for using their credit card which can be as much as a couple of hundred dollars per year. However, some banks have no annual credit card fee
- cash advance fee – obtaining cash via a credit card is expensive. An additional cash advance fee is charged for each transaction and interest is accrued on the amount of cash withdrawn immediately, unlike regular credit card transactions where a grace “interest-free” period is allowed
- finance charge – interest costs and other fees added together to calculate the charge for using the credit card.
Understanding Credit Card Statements
Understanding some of the terms used on your credit card statement can sometimes be confusing; some of the common terms used on credit card statements are:
- average daily balance – this is the method by which credit cards determine your payment due. Each day’s balance is added up and the total is divided by the number of days in the billing cycle. The average daily balance is then multiplied by the monthly periodic rate.
- minimum payment – is the lowest amount you can pay to avoid incurring additional charges or defaulting on your credit card account. However, if you only pay the minimum amount due each month, it will take a long time to pay off the full balance, as interest charges accrue on the outstanding balance each month
- payment due date – the date by which the credit card company requires payment; the payment must be received and/or processed by the credit card issuer by the payment date, otherwise additional charges may be incurred.
Basic Credit Card Terminology
There are many financial terms associated with credit card use. It is important to understand the basic terms, in addition to the “fine print.” Make sure that you understand the exact charges and fees associated with your credit card to avoid any unpleasant surprises when you receive your credit card statement. Understanding some basic credit card terms may save you frustration, time and even money.