Some basic credit card terms defined.
Have you ever read the fine print? Do you even know what the larger print means? Here are some definitions that will help you to better understand the “deal” you are getting when you apply for a credit card.
If you don’t understand what is being said, credit card offers and statements could lead you down the path to deep debt when you thought you were at 0% interest. Here is what some of the frequently used credit card terms mean:
Average daily balance—This method of calculation is used by most credit cards companies to determine your your payment due. An average daily balance is determined by adding each day’s balance and then dividing that total by the number of days in a billing cycle. The average daily balance is then multiplied by a card’s monthly periodic rate, which is calculated by dividing the annual percentage rate by 12. A card with an annual rate of 18 percent would have a monthly periodic rate of 1.5 percent. If that card had a $500 average daily balance it would yield a monthly finance charge of $7.50.
Annual percentage rate (APR)—This is the yearly rate of interest including fees and costs paid to acquire the loan. Lenders are required by law to disclose the APR. The rate is calculated in a standard way, taking the average compound interest rate over the term of the loan, so borrowers can compare loans.
Cash-advance fee—A charge by the bank for using credit cards to obtain cash. This fee can be stated in terms of a flat per-transaction fee or a percentage of the amount of the cash advance. For example, the fee may be expressed as “2%/$10”. This means that the cash advance fee will be the greater of 2 percent of the cash advance amount or $10.
The banks may limit the amount that can be charged to a specific dollar amount. Depending on the bank issuing the card, the cash advance fee may be deducted directly from the cash advance at the time the money is received or it may be posted to your bill as of the day you received the advance. The cost of a cash advance is also higher because there generally is no grace period. Interest accrues from the moment the money is withdrawn.
Card holder agreement—The written statement that gives the terms and conditions of a credit card account. The cardholder agreement is required by Federal Reserve regulations. It must include the Annual Percentage Rate, the monthly minimum payment formula, annual fee if applicable, and the cardholder’s rights in billing disputes. Changes in the cardholder agreement may be made, with written advance notice, at any time by the issuer. Rules for imposing changes vary from state to state, but the rules that apply are those of the home state of the issuing bank, not the home state of the cardholder.
Finance charge—The charge for using a credit card, comprised of interest costs and other fees.
Grace period—If the credit card user does not carry a balance, the grace period is the interest-free time a lender allows between the transaction date and the billing date. The standard grace period is usually between 20 to 30 days. If there is no grace period, finance charges will accrue the moment a purchase is made with the credit card. People who carry a balance on their credit cards have no grace period.
Minimum payment—The minimum amount a cardholder can pay to keep the account from going into default. Some card issuers will set a high minimum if they are uncertain of the cardholder’s ability to pay. Most card issuers require a minimum payment of two percent of the outstanding balance.
Over-the-limit fee—A fee charged for exceeding the credit limit on the card.
Periodic rate—The interest rate described in relation to a specific amount of time. The monthly periodic rate, for example, is the cost of credit per month; the daily periodic rate is the cost of credit per day.
Pre-approved—A credit card offer with “pre-approved” only means that a potential customer has passed a preliminary credit-information screening. A credit card company can spurn the customers it invited with “pre-approved” junk mail if it doesn’t like the applicant’s credit rating.
Secured card—A credit card that a cardholder secures with a savings deposit to ensure payment of the outstanding balance if the cardholder defaults on payments. It is used by people new to credit, or people trying to rebuild their poor credit ratings.
Teaser rate—More commonly known as the introductory rate, it is the below-market interest rate offered to entice customers to switch credit cards or lenders.
Variable interest rate—Percentage that a borrower pays for the use of money, and which moves up or down periodically based on changes in other interest rates.
Hopefully this has helped you to better determine which lender is offering the best deal for your specific needs.
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