If you are credit card shopping, comparison is the key to finding the best card for you. Not all cards are created equal and as you conduct your research, you are going to discover tons of information. If you are new to the credit card industry, you may feel overwhelmed with all the language used to relate the terms of each card. Only by understanding credit card terminology and how to read the fine print will you be able to master your credit card costs, rewards and benefits.
A Primer for Newbies, Reminders for the Rest of Us
Believe it or not, the card companies are not trying to trick you with the language. The majority of the wording comes from rules imposed by the Federal Trade Commission in an effort to protect consumers. So, for those that are new to all this and for those that need a refresher, here is a glossary to help you understand the basic terminology.
Index of Defined Terms
Affinity Card
An affinity credit card is offered in conjunction with two parties, the first is the card issuer and the other is a non-financial group with which consumers have an affinity. Universities, sports franchises and non-profit organizations are examples of affinity groups.
Annual Fees
An annual (yearly) fee associated with having a credit card is a separate fee from interest rate on purchases. Many credit card issuers charge an annual fee for the use of their card, typically $20-$50. Some issuers charge no annual fee. Ideally, you want to find a card with no annual fee, however if you have no, limited or bad credit you may have to settle for one until you have built more credit.
Annual Percentage Rate (APR)
This is the most important and least understood term. Card companies following federal guidelines try to make the terms easy to understands, but something always gets lost in translation. APR is a measure of the cost of credit, expressed as a yearly interest rate. The US average is around 18%.
Average Daily Balance
The average balance is for each day in the billing period, and is calculated by adding all daily balances together and dividing that total amount by the number of days in the billing period. This can be useful to you and credit companies as a guideline for your spending habits.
Balance Transfer
The balance transfer allows you to use the available credit on one credit card and pay off another, ideally with a lower cost. Be aware however that closing out or transferring balances, even in order to consolidate debt, can hurt your credit score.
Billing Cycle
The number of days in the billing period. It includes the day after the previous close date through the current closing date of the account.
Cash Advance Transaction Finance Charge
A fee assessed on the date a new cash advance transaction is posted to an account. If your spending habits include accessing accounts for cash, you want to avoid this kind of fee or look for the lowest one possible.
Credit Life Insurance
Credit Life Insurance is a version of insurance sold by affiliates of credit card issuers that can repay the outstanding card balance in the event of the death of the primary card member. If you already have life insurance in place that will cover this, then you should not opt for the extra coverage.
Credit Rating
A rating (or score) calculated by the credit bureaus and based on your past payment behavior, income, employment and other factors that serve as a general predictor of ability to repay debts. Each credit bureau has their own formula for getting this score, that is why when keeping an eye on your credit you want to get the reports from all three bureaus.
Index
The index is the standard rate, such as the prime rate, to which a margin amount is applied to calculate a variable interest rate. (For example: Prime + 2.9%) Variable rate cards are more feasible for consumers that pay off their balances at the end of each month. Therefore, if the economy hits a slump and rates go up you avoid the rate increase.
Interest
Also known as a finance charge, interest is the fee you pay for borrowing money. This is the main way credit card companies profit. Interest is listed on your credit card statement as the Monthly Finance Charge.
Interest Rate
The percentage, per unit of time (monthly), that a bank or financial institution charges a customer for borrowing money. Ideally you want the lowest possible interest rate, especially if you carry a balance each month.
Introductory Rates
Credit cards often offer lower or 0% introductory APRs as special promotional offers. After a period of time, the rate returns to the standard rate. It is very important to read the terms and conditions so that you understand how long the introductory rate will last and what the rate will be after the introductory period.
Grace Period
The grace period is a term which can cause more confusion than you might think. The grace period is the time between the date of purchase and the date that the interest starts being charged. If your card has a standard grace period, it allows you to avoid finance charges by paying the current balance in full. If there is no grace period, the issuer imposes a finance charge from the date you use your card or the date each transaction is posted to your account.
Minimum Finance Charge
If your account is subject to a finance charge, a minimum finance charge may apply. Normally the charge is around $0.50.
Monthly Finance Charge
If your credit card balance is not paid in full each month, you will be charged a Monthly Finance Charge. The charge is calculated on the statement closing date by multiplying the Average Daily Balance on the account by the Monthly Finance Charge or the Annual Percentage Rate divided by 12.
Minimum Monthly Payment
The minimum dollar amount that must be paid each month to prevent a credit card account from being delinquent. The amount is based on the percentage of your Outstanding Balance or a minimum fixed amount.
Outstanding Balance
The outstanding balance is the amount you owe (balance) on your credit card. This is the balance used to calculate payments on which interest is charged.
Over-the-Credit-Limit-Fee
The fee that may be imposed if your outstanding balance exceeds your credit limit. It is very important to keep track of your balance, especially when using multiple cards.
Periodic Rate
This is the rate the card issuer applies to your outstanding balance to calculate the finance charge (interest payment) for each billing period. This is also important to check on each statement you receive each month. You may think that you understand what the bank is charging you, but you may be shocked to find that terms have changed and you are now paying much more.
Prime Rate
The “prime rate” is a base rate on which a margin amount is added to calculate your finance charge (e.g., “prime + 12 %”). The prime rate used is taken from the Money Rates column of The Wall Street Journal. However, it may not necessarily be the lowest or best rate at which loans are made.
Pre-approved
A conditional offer of credit from a credit card issuer based on a pre-qualification of the individual’s credit from an abbreviated credit bureau report or based on final score. Upon acceptance of such an offer, the issuer makes a credit decision (usually after obtaining more detailed credit information) and assigns an APR based on the most current credit profile of the customer.
Regulation Z
Under Reg Z, credit card issuers are required to disclose the terms and conditions to potential and existing cardholders at the point of account opening and at regular intervals. Upon soliciting and opening new credit card accounts, issuers must disclose key information relevant to the costs of using the card, including the applicable interest rate that will be assessed on any outstanding balances and several key fees or other charges that may apply, such as the fee for making a late payment. In addition, issuers must provide consumers with an initial disclosure statement before the first transaction is made with a card. The card member agreement is the governing document for the account and provides more comprehensive.
Schumer Box
Okay, this term is really more of a trivia answer than a term you need to know, but it is interesting any way. The Schumer Box is named for Senator Charles Schumer, D – NY, the former chairman of the Senate Banking Committee that passed landmark consumer protection legislation (RegZ). This standardized disclosure “box” features relatively consistent terms and conditions for credit card offers and specific terms and conditions such as purchase and cash advance interest rates, annual fees and rate calculation methods. The disclosure are required for all new account solicitations.
Secured Credit Card
A credit card that requires you to promise collateral to receive credit. The collateral amount is normally kept in an interest bearing account by the card issuer and is refunded to you after you have proven creditworthiness according to their terms.
Tiered Rewards
A rewards earning calculation that is typically disclosed as “up to” a certain percentage cash back. Various spending tiers earn increasing percentage rewards, up to the maximum amount advertised. For example, a reward offer advertised as up to 1% cash back could involve 0.25% for the first $1,000 in spending, 0.5% for the next $1,000 and 1% for all spending in excess of $2,000.
Total Finance Charge
The sum of the Monthly Finance Charge and any Cash Advance Transaction Finance Charges (or the Minimum Finance Charge, if applicable)
Transaction Fees
Most issuers charge a fee if you use the card to get a cash advance, if you fail to make a payment on time or if you exceed your credit limit. Some may charge a flat fee every month whether you use the card or not. The type of transaction fees depends on the credit card company.
Truth in Lending Act
The Truth in Lending Act (TILA) is the primary federal law governing the extension of consumer credit by lender in the United States. Congress instituted the TILA in 1968 to ensure more accurate disclosure of credit terms so that consumers could compare the various credit terms available, to avoid the uninformed use of credit, and to protect them against inaccurate and unfair credit billing and credit card practices.
Universal Default
Universal default is a provision allowing issuers to increase card members’ interest rates for any adverse financial actions such as when cardholders failed to make timely payments to other creditors, like other credit card issuers, utilities, car lenders, property owners or mortgage lenders.
Variable Interest Rate
With variable-rate cards, the APR changes when interest rates or other economic indicators change. Also known as a floating rate. A variable rate may not be a good idea for someone that carried a balance. Variable rate APR cards usually change the interest rate charged based on changes to the Prime Rate (defined above).
We hope this glossary of credit card terms helps you navigate the fine print and find the best card for you.
