Credit Card Terms 101 | What You Need To Know

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Credit cards are a popular way to pay for purchases these days.

Not only is it convenient to not have to carry cash, but buying things with credit cards offer additional benefits, like extended warranties and insurance.

But credit cards can also be dangerous to your finances.

Because of this, it is important you understand common credit card terms.

By knowing the basic terms of credit cards, you can make smart decisions, which over time, can help you improve your credit, earn lower interest rates on loans, and possibly earn rewards.

In this post, I cover the credit card terms you need to know.

Common Credit Card Terms You Need To Know

Annual Fee

The annual fee is the fee that a bank or credit card company charges the cardholder for having the credit card.

This fee is charged one time a year, usually around your anniversary date, which is the date you opened your credit account.

The fee is added to your monthly statement.

The average annual fee is $110 with some credit cards charging close to $500 for the privilege of using their card.

Annual Percentage Rate

The annual percentage rate or APR is the interest rate a credit card charges for borrowing money.

When you buy on credit, you are borrowing money, and you pay it back on a monthly basis.

If you pay your credit card statement in full each month, then there is no interest to pay and the APR is meaningless to you.

The average annual percentage rate for credit cards is 16.22%.

Note that credit cards charge simple interest on the money you borrow, not compound interest.

• Read now: Learn the difference between compound interest vs. simple interest

Authorized User

An authorized user is a person you allow to make purchases using your credit card.

They receive their own credit card and credit card number, but the charges show up on your account since you are the primary cardholder.

The authorized user is not legally responsible for paying the bill.

They are only seen as a secondary cardholder, not an account holder.

Most times, an authorized user is a family member, such as a spouse or a child who you are trying to build credit for.

It is important to only add users you trust as they can spend up to the credit limit on your account, but have no liability in terms of paying the bill.

Available Credit

Your available credit is the difference between your credit limit and the amount of money you have charged on your credit card.

For example, if you have a credit limit of $10,000 and you have $2,000 worth of charges on your card, then your available credit is $8,000.

Balance

The balance is the amount of money you owe the credit card company at any given time.

This amount will change as you make payments, purchase more using your credit card, and are issued refunds.

Balance Transfer

A balance transfer is when you move the balance you owe from one credit card to another credit card.

• Read now: Click here to learn the pros and cons of balance transfers

Most people use this strategy to save on interest as many balance transfers offer special interest rates that are lower than your standard interest rate.

Finally, you can also do a balance transfer for debt other than credit cards.

Using convenience checks, which I define below, you can move personal loans, car loans, and other debt to a credit card.

Balance Transfer APR

This is the interest rate on balance transfers.

Many credit cards offer a low interest rate, including 0%, on balance transfer offers.

Most balance transfer APR’s are only good for a specific amount of time.

After the promotional period ends, the standard purchase APR is applied.

Balance Transfer Fee

Most credit cards charge a balance transfer fee for completing the transfer.

The most common fee is 3% or 5% of the amount transferred.

There is no maximum balance transfer fee, but most have a minimum fee of $5.

Using a 3% fee as an example, if you transfer $5,000 between cards, the fee comes to $150.

Billing Cycle

Your billing cycle is the period between billing statements.

Most billing cycles range from 28 to 31 days, depending on the month.

Your cycle will typically end the same time each month, but because each month has a different number of days, this could vary by a day or two.

If you don’t like when your billing cycle ends, for example it makes it hard for you to budget, you can request a change.

• Read now: Click here to learn how to start a budget
• Read now: Discover 17 types of personal budgeting methods to try

A simple phone call to your credit card issuer can result in a change that makes managing your finances easier for you.

Cash Advance

A cash advance is an easy way to get access to cash.

For example, you might need cash to make a purchase at a place that doesn’t accept credit or debit cards.

• Read now: Learn the pros and cons of debit cards

As a result, you can use your credit card to get cash.

If you have a PIN with your credit card, you can simply go to an ATM and make a cash withdrawal.

If you don’t have a PIN, you can go to a bank and withdraw the money.

While this is a convenient way to get cash, understand there is a limit to how much paper money you can get.

Most credit card companies limit cash advances to a few hundred dollars.

So if you have a credit limit of $10,000 you won’t have access to this amount of cash.

If you need access to that amount of money, a balance transfer might be a better option.

Cash Advance APR

This is the interest rate that is charged when you take out a cash advance.

Note that the cash advance APR will be higher than your standard purchase APR.

Also, some credit card companies treat convenience checks like cash advances and not balance transfers.

So be sure to ask how yours handles them so you are not hit with a major surprise if you decide to use one.

Cash Advance Fee

For the convenience of having quick access to cash, credit card companies will charge you a fee for taking advantage of a cash advance.

Each card issuer treats this fee differently.

Some charge a flat fee for each advance you take.

Others charge a percent of the advance you take out.

So if you take out $1,000 and the fee is 5%, you owe $50.

Finally, some credit cards use a combination of both.

In this case, they set the fee as 5% or $20, whichever is greater.

Also note that this fee is in addition to the interest rate you pay on the cash advance.

At the end of the day, you are getting hit with fees and a high interest rate when you use this feature of your credit card.

Cash Back

Cash back is a reward that some credit cards offer.

Every time you spend money on your cash back credit card, you earn a percent back as cash.

This amount is usually 1% of the purchase.

So if you charge $1,000 on your card, you earn $10 in cash back.

Using cash back credit cards is a great way to make money with a credit card.

• Read now: Learn the many ways you can make money using your credit card

To redeem your cash back, you can either use it as a statement credit, helping pay off or pay down a balance you have on your card, or you can request the money in the form of a check or transfer to your bank account.

Of course, to make earning cash back worth it, you need to pay off your balance in full each month.

Otherwise, you will be paying more in interest than you are earning in cash back.

If cash back interests you, click the link below to find the best cash back credit card for you.

Convenience Checks

These are blank checks from the credit card company to help you complete a balance transfer from another credit card, other debt, or simply to make purchases.

You fill out the check and take it to the bank to cash.

Then you use the money to pay off your other debt.

Now you have a balance on your credit card.

You will be charged the balance transfer interest rate during the promotional period and will incur the transfer fee.

Note that some credit card companies treat convenience checks like cash advances, which charge higher interest rates, and don’t offer a grace period.

Before you decide to cash one of these checks, be sure you know how your credit card company treats the check.

Charge Card

A charge card is a type of credit card with a major difference.

This difference is you don’t have the option to pay your balance back over time.

With a charge card, you have to pay the balance in full every month.

If you don’t pay your balance off, then you will get charged late fees and could face restrictions with your card.

Most charge cards don’t have a credit or spending limit.

American Express used to be the main issuer of charge cards, but very few charge cards exist for personal consumer use.

Most charge cards today are used by corporate and businesses.

Credit Bureau

A credit bureau is an agency that collects consumers credit information.

Lenders use this information to determine if they will extend you credit or a loan.

There are three major credit bureaus, Transunion, Equifax, and Experian.

Each creditor uses a different bureau, so each bureau will has slightly different credit information about you on file.

It is important to review your credit report from each major bureau as errors do occur.

And these errors could result in you being denied credit or a lower credit score.

Additionally, it is important to review your credit file as this can be an early sign of identity theft.

• Read now: Learn how to protect yourself from identity theft

Luckily the government allows you to get your credit report free one time a year.

• Read now: Find out how to get 3 free credit reports a year

Just go to AnnualCreditReport.com to get access.

Credit Freeze

A credit freeze is a way to protect yourself from identity theft.

When you freeze your credit, you stop anyone from opening new credit accounts in your name.

This includes you as well.

So if you decide to refinance your mortgage or open a new credit card, you will first need to unfreeze your credit to do so.

There is no cost to freeze or unfreeze your credit file.

• Read now: Learn the pros and cons of freezing your credit

And while it is not a foolproof way of protecting your personal information, it is a good first measure that you should consider taking.

Credit Limit

Your credit limit is set by the credit card issuer.

They take into account your credit history and credit score to determine your risk profile.

Based on this, they issue an amount that you can borrow against.

The lower your credit worthiness, or credit score, the lower your credit limit.

The higher your credit worthiness, the higher your limit.

When I got my first credit card in college, my limit was $500.

Over the years, as I’ve made payments on time and shown the card company I am responsible with credit, they have increased my limit.

You can contact your credit card company and request an increase in your credit limit.

Depending on your history with the company, they may or may not honor your request.

Credit Score

Your credit score is financial formula that makes it easy to see how good your credit history is.

There are many factors that make up your credit score, including the following.

FICO is the main company to computes credit scores.

Most scores range between 350 and 850.

The higher your score, the better your credit.

When you have a high credit score, you get the lowest loan rates and are most likely to have credit extended to you.

• Read now: Click here to learn how to increase your credit score

When you have a low score, you have a harder time getting approved for loans.

Also your interest rate if approved will be much higher.

Credit Utilization Rate

Your credit utilization rate, also called your credit utilization ratio is a percentage of how much of your available credit you are using.

To determine your ratio, you divide the amount of revolving credit you are using by the total amount of credit available to you.

So if you have 3 credit cards each with a credit limit of $1,000 and you have a balance of $400 on each, you have $1,200 of credit you are using and $3,000 of total credit available.

Simply divide $1,200 by $3,000 to get a 40% utilization rate.

The higher this number, the bigger the negative impact on your credit score.

Ideally you want this ratio to be between 10% – 25% as this shows you are responsible with your credit.

Note that this ratio only takes into account revolving credit, which is your credit cards and any lines of credit you have.

It does not include mortgages, car loans, or student loans.

Foreign Transaction Fee

This is a fee you are charged when you spend money overseas.

If you buy something in a foreign currency or make a purchase that passes through a foreign bank, your credit will assess you this fee.

In most cases, the fee ranges between 1% and 3%.

While this seems low, it can add up if you travel overseas a lot.

• Read now: Click here to learn how to travel cheaply

For example, if you spend 1,000 Euros in Ireland, you will pay a $30 foreign transaction fee, assuming the card charges you 3%.

Luckily, there are many credit cards that do not charge this fee.

So if you do travel internationally, it makes sense to find a credit card that waives this fee.

Grace Period

The grace period is the time between when your billing cycle ends and when your payment is due.

The law states that you must have your credit card statement no later than 21 days before the due date.

During the grace period, interest does not accrue.

It is for this reason many people use their credit card as a short term interest free loan.

Here is how this works.

Let’s say your billing cycle ends on the 25^th of the month and you currently don’t have a balance.

You make a $5,000 purchase on the 26^th of the month.

Since this is the start of your next billing cycle, you have roughly 28 days before your cycle closes.

So the following month your billing cycle closes and then you have your grace period, which is usually 25 days until your payment is due.

In effect, you spent money two months ago and paid zero interest, assuming you pay the balance in full when your payment due.   

Of course, if you don’t pay your balance in full, you will be charged interest on the unpaid amount.

Introductory APR

The introductory rate is the promotional APR you get when you open a new account or take advantage of a balance transfer.

This is called introductory because it is only for a limited time, say 6 months.

Once the introductory period ends, your interest rate rises to the APR on new purchases.

Late Payment

This is when you make a payment after your due date.

If you pay after your due date, a few things happen.

First, as long as you make your payment within 30 days of the due date, nothing will get reported to the credit bureau.

After 30 days, you will have a knock on your credit report and your credit score will drop as a result.

However, there is an impact on your balance immediately if you are late.

First, you will be charged a late payment fee.

Also, many credit cards will default from your standard APR to a penalty APR, which can be significantly higher.

Also, if you have any promotions on your card, like a balance transfer offer with special financing, the special financing goes away.

Therefore, it is critical you pay on time.

The easiest way to ensure you are never late with a payment is to use bill pay.

• Read now: Discover the pros and cons of automatic bill pay

Of course, you can also set up reminders yourself or pay the bill when it comes in the mail as well.

Late Payment Fee

This is the fee the credit card company charges you when you are late with your payment.

The fee amount varies by credit card, but is usually $35 or $40.

The good news is if you realize you forgot to pay and your payment was due recently, you can call to ask for the fee to be waived.

Assuming you are not notoriously late with your payments, they will honor your request and waive the fee.

Minimum Payment

The minimum payment due is the least amount of money you owe on your credit card statement.

The minimum payment you owe varies based on how much money you owe.

If you have a small outstanding balance, the minimum payment is typically a small set amount of money, like $25 or $35.

When you have a large credit card balance, it will be based on a percentage, usually around 2%.

If your balance is only a few dollars, say like $15, then the entire balance is due as the minimum payment.

So if you have a statement balance of $8,000 and a 2% minimum, you would owe $160.

Purchase APR

This is the standard interest rate on new purchases.

It varies by credit card, with the average purchase APR being around 18%.

While the lower the interest rate the better, if you are smart with credit cards and pay your balance in full each month, the purchase APR will not come into play.

• Read now: Learn the pros and cons of credit cards

Know that this term is interchangeable with interest charges and finance charges as well.

Also, your interest rate is not fixed.

It is a variable APR that changes as the prime rate changes.

To understand how your interest rate works with your card, you need to read your credit card agreement, which outlines this and other terms and conditions in the fine print.

Secured Card

A secured card is a type of credit card that requires you to put down a cash security deposit as collateral.

This card is for people who have no credit history or bad credit and cannot get approved for a regular credit card.

While this is an option to help build or improve your credit, you could also be added as an authorized user to a family member’s credit card as well to build or improve your credit.

If you are looking for a secured credit card to help build your credit, click on the link below to find the perfect one for you.

Schumer Box

The Schumer Box is a table of information that is on credit card agreements that shows the credit cards rates and fees.

The information the box shows includes:

The reason for this information is so consumers have an easier time comparing the similarities and differences between credit cards.

It began to appear on credit card agreements after the 1968 Truth In Lending Act and is named after Senator Chuck Schumer.

Travel Rewards

Travel rewards are another perk that some credit cards offer to consumers.

They work in a similar fashion to cash back.

Instead of earning cash, you earn points that you can redeem to help pay for travel related expenses.

• Read now: Learn how to maximize travel rewards

Different cards offer different points.

For example, some offer 1 point per dollar spent on most purchases and 2 points per dollar spent on travel expenses.

In some cases, you can transfer the points you earn to other travel rewards programs, like airline frequent flyer miles.

If you are interested in finding travel reward credit cards, click the link below to find the highest paying ones to help you score free or reduced travel.

Final Thoughts

There are the major credit card terms you need to understand.

There are more, but these are the ones most consumers will encounter.

It is important you understand them as they not only can help you save money and earn rewards, but also help you keep your credit score high.

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