Understanding these terms can help you maintain healthy credit. (iStock)
Whether you’re a new cardholder or simply want to be a smart consumer, understanding credit card terms can help you make the best choices for your finances. Credit card offers and rules can vary. As you review available options and find the right card for you, keep these 10 common credit card terms in mind.
An annual fee is the amount consumers are charged to use the card. About 30 percent of credit cards charge an annual fee with the average being $110, according to the 2019 U.S. News Consumer Credit Card Fee Study. Cards that charge an annual fee usually offer greater benefits than free cards, such as extra airline miles or access to private discounts. To encourage sign-ups, credit card companies will sometimes waive the annual fee during a cardholder’s first year.
Annual Percentage Rate (APR)
Credit cards charge cardholders interest on any balance that is not paid by the grace period, and the APR is the rate over the course of a year. Credit cards may have different APRs depending on the type of transaction, such as for purchases, cash advances, balance transfers and penalties. Some cards also offer an introductory APR. To determine your monthly interest rate, simply divide your APR by 12.
A balance transfer is when you take an outstanding balance you owe on one credit card and move it to another credit card. Some credit card companies will offer no-interest introductory APRs for balance transfers. After the promotional period, you will be charged a balance transfer APR, which can be higher than the card’s APR for purchases. In addition, some cards charge a balance transfer fee when you transfer your debt.
A credit limit is the amount of money you can charge to a credit card without being declined or charged a penalty. Your credit limit will be based on your credit score. Credit card companies often automatically raise your credit limit over time based on your payment history. If you exceed your credit limit, you may be charged an over-limit fee or higher penalty APR. You can opt-out of over-limit charges and fees.
A credit score is a number assigned by credit reporting agencies such as Equifax, Experian and TransUnion. It’s based on your history of repaying debt as well as your outstanding balances, the number of credit cards and loans you have, the percentage of outstanding debt compared to available credit, and the age of your credit. The most common credit score is a FICO Score, which ranges from 300 to 850. The higher number, the better your credit score is considered to be, and card issuers will review your credit score when you apply for a card.
A grace period is the time between the close of a billing cycle and the date the balance is due. During a grace period, interest is not charged. Some credit card companies only offer a grace period to cardholders who do not carry a balance. Grace periods can vary, but they must be at least 21 days, according to the Credit CARD Act of 2009. In addition, grace periods may not apply to balance transfers or cash advances.
Late payment fee
If you fail to pay the minimum payment on a credit card by the due date, you will be charged a late payment fee. According to the 2019 U.S. News Consumer Credit Card Fee Study, credit card companies can charge a late fee up to $28 on the first occurrence. If your payment is late again within six billing cycles, credit card companies can charge as much as $39. In addition to being charged a late payment fee, delinquent balances may result in higher penalty APR.
The minimum payment on a credit card is the smallest amount a cardholder can pay to remain current and in good standing with the card issuer. The minimum payment is based on a percentage of your outstanding balance, usually between 1 and 4 percent, or a set amount, such as $25, whichever is higher. Your credit card statement will include a minimum payment warning, which is required by the Credit CARD Act of 2009. It discloses the number of months it will take to pay the balance as well as the total interest the cardholder will pay if they only make the minimum payment each month.
Revolving credit is a flexible type of loan that does not have a fixed number of payments or a set term. Credit cards are a type of revolving credit. Cardholders can borrow any amount up to the credit limit. After a balance is repaid, it can be re-borrowed it again and again. Cardholders pay interest only on the outstanding balance that is outside the grace period.
Credit cards charge transaction fees on certain types of card activity. If you use a credit card at an ATM to take a cash advance, you may be charged an ATM or cash advance fee, which can range from 2 to 8 percent or a minimum fee of $5 to $10, according to the 2019 U.S. News Consumer Credit Card Fee Study. Like debit card transactions, some card issuers waive fees if you use your credit card at an ATM. Another type of transaction fee is a foreign transaction fee, which is charged if you make a purchase out of the country or with a merchant who is out of the country. Foreign transaction fees are usually up to 3 percent of the amount or a minimum fee of $5 to $10. Some card issuers will waive foreign transaction fees.