Credit cards are used by millions of consumers in today’s consumer-driven world. Many people even find them necessary to perform many everyday tasks, such as buying groceries and getting gas for their vehicles. Life in many ways has become easier with the availability of credit cards.
Online purchases, car reservations, and traveling internationally without added fees are all possible through the expansion of credit cards. Despite their popularity, few fully understand how credit cards work and the terms associated with them.
Unfortunately, with convenience comes ongoing risks, as the use of credit combined with misunderstanding how they work can lead to overspending, expensive debt, and fraud. America, as a whole, now carries far more personal debt than ever before and has seen a rise in personal bankruptcies because of it.
To avoid these debt traps, consumers must take the time to gain knowledge about credit cards. Let’s start with some basic terminology inherent to nearly all major credit card products currently available.
Common Credit Card Terms
Annual Fee – this is a flat service fee charged on some credit cards each year. Similar to a membership fee, an annual fee is a payment made in exchange for access to the card and its perks. There are many no-annual-fee credit card options to choose from these days, as well as other cards that waive the fee for the first year.
Annual Percentage Rate (APR) – The annual percentage rate on a credit card, known also as the APR, is the yearly rate of finance charges. This can be fixed or variable, although most credit cards now come with variable rates. A variable APR changes in line with broad interest rates, such as the Prime rate or the Treasury bill rate.
Introductory Rate – a temporary, lower APR used to attract new customers that typically last between six and eighteen months before converting to the normal fixed or variable rate. Some introductory rates are as low as 0%, meaning no finance charges are billed during the stated timeframe.
Finance Charge – a credit card finance charge is the interest cost paid, based on the APR, each billing cycle. The amount depends on the outstanding balance, APR, and how that APR is calculated.
Grace Period – a set number of days given to the consumer to pay the balance before the credit card company charges interest, typically 20 or 30 days.
Credit Line – a credit card’s credit line is the maximum amount of credit extended to the cardholder from the card issuer or bank. For instance, a credit line of $5,000 means a cardholder can spend up to that amount if needed. This is also known as the credit limit.
Cash Advance – some credit cards offer a cash advance option which works as an instant cash loan from a card’s available credit. It often includes additional cash advance withdrawal fees and may be lent at a higher interest rate. There are usually limitations on how much you can withdraw as a cash advance.
Balance Transfer – often used by consumers to consolidate balances, credit card companies may offer lower rates to entice people to switch credit cards. These reduced or zero APR offers typically last between six months and one year. Transferring a balance from a previous card to a new card with a lower interest rate (or other benefits) is known as a balance transfer.
Minimum Payment– the lowest amount of money required that month to avoid defaulting on your credit card. Typically, a minimum payment is calculated as a percentage of the outstanding balance owed on the card at the time the billing statement is generated.
These are some of the most common credit card terms to look for when applying for a new card. If you’re looking for a more advanced term, here’s a comprehensive credit-related glossary of terms broken down into specific categories.
Next we cover the different credit card types.