The lingo used in the finance world sometimes seems like a foreign language. Here are some terms that will help you better understand your credit card.
The APR or annual percentage rate is the annual interest rate applied to your credit card balance and used to calculate your finance charge. The current average credit card APR is around 15% (as of 1/4/12). Because interest accrues monthly or even daily, the annual percentage rate is broken down to a periodic or daily rate before your finance charge is calculated.
The finance charge is the monthly interest charge added to your account. The finance charge is basically calculated by multiplying your balance by the periodic interest rate. Sometimes you may not be subject to a finance charge, e.g. when you have a 0% promotional offer or you have a grace period on your balance.
The grace period is the time you have to pay your balance in full and avoid a finance charge. With some credit cards, the grace period only applies when you start the billing cycle with no balance. Cash advances seldom have a grace period and that means you won't get the opportunity to avoid interest on that balance.
Your credit card billing cycle is the amount of time between your billing statements.
Billing cycles don't necessarily coincide with the calendar month and they're usually not 30 to 31 days long. Instead, billing cycles are more like 21 to 24 days long and they're based on when your billing statement is prepared, not when your payment is due. Your finance charges are calculated based on the number of days in your billing cycle.
The credit limit is the maximum balance you can have on your credit card without facing an over-the-limit penalty. Your credit card issuer may be set your credit limit based on your income and credit history. If you're just starting out with credit, your credit limit will be low, like $250 or $500. Once established a solid credit history, credit limits are much higher, like $15,000 or more. Some credit cards have replaced credit limits with spending limits which are similar, except you can exceed the spending limit without incurring a fee.
Your available credit is the difference between your credit limit and your current credit card balance. It's the amount of credit that's available for you to use right now. If you've opted-out of over-the-limit transactions, then you won't be able to spend more than your available credit. Otherwise, your card issuer may allow you to spend a certain amount more than your current available credit.
A balance transfer is a type of credit card transaction where you transfer the balance from one credit card onto another credit card. You might transfer a balance to a credit card with a low promotional rate or to a credit card with more favorable terms. Note that balance transfers sometimes have a different APR than purchases and may involve a balance transfer fee up to 4% of the transfer amount.
A cash advance is another type of credit card transaction where you withdraw cash from an ATM using your PIN. Cash advances usually come with a fee, have no grace period, and have a higher APR than purchases or balance transfers. Because cash advances can be so expensive, it's seldom (if ever) a good idea to take out a credit card cash advance.
Past due is an account status that means you're behind on your minimum payment. Your account becomes past due when you pay less than the minimum payment or if you don't make a payment at all. You'll be charged a late fee if your payment is just a few minutes past due. After becoming 30 days past due, your past due status will be reported to the credit bureaus. At 60 days past due, your card issuer may impose a penalty or default rate. Finally, if your account reaches 180 days past due, it will typically be charged-off and sent to another department or company for further collection.
Most credit card issuers report your account activity to companies known as credit bureaus or credit reporting agencies. These bureaus collect information on millions of consumers and compile a credit report for each consumer. Then, businesses like your credit card issuer or a lender or even an employer, can purchase a copy of your credit report and use it to evaluate you as a candidate. Businesses must have a "permissible purpose" before pulling your credit report.
APR or Annual Percentage Rate
The APR or annual percentage rate is the annual interest rate applied to your credit card balance and used to calculate your finance charge. The current average credit card APR is around 15% (as of 1/4/12). Because interest accrues monthly or even daily, the annual percentage rate is broken down to a periodic or daily rate before your finance charge is calculated.
- Credit Card Interest Rates Explained
- When Can Creditors Raise Your Interest Rate
- How Interest Rates Affect Credit Card Repayment
Finance Charge
The finance charge is the monthly interest charge added to your account. The finance charge is basically calculated by multiplying your balance by the periodic interest rate. Sometimes you may not be subject to a finance charge, e.g. when you have a 0% promotional offer or you have a grace period on your balance.
Grace Period
The grace period is the time you have to pay your balance in full and avoid a finance charge. With some credit cards, the grace period only applies when you start the billing cycle with no balance. Cash advances seldom have a grace period and that means you won't get the opportunity to avoid interest on that balance.
Billing Cycle
Your credit card billing cycle is the amount of time between your billing statements.
Billing cycles don't necessarily coincide with the calendar month and they're usually not 30 to 31 days long. Instead, billing cycles are more like 21 to 24 days long and they're based on when your billing statement is prepared, not when your payment is due. Your finance charges are calculated based on the number of days in your billing cycle.
Credit Limit
The credit limit is the maximum balance you can have on your credit card without facing an over-the-limit penalty. Your credit card issuer may be set your credit limit based on your income and credit history. If you're just starting out with credit, your credit limit will be low, like $250 or $500. Once established a solid credit history, credit limits are much higher, like $15,000 or more. Some credit cards have replaced credit limits with spending limits which are similar, except you can exceed the spending limit without incurring a fee.
Available Credit
Your available credit is the difference between your credit limit and your current credit card balance. It's the amount of credit that's available for you to use right now. If you've opted-out of over-the-limit transactions, then you won't be able to spend more than your available credit. Otherwise, your card issuer may allow you to spend a certain amount more than your current available credit.
Balance Transfer
A balance transfer is a type of credit card transaction where you transfer the balance from one credit card onto another credit card. You might transfer a balance to a credit card with a low promotional rate or to a credit card with more favorable terms. Note that balance transfers sometimes have a different APR than purchases and may involve a balance transfer fee up to 4% of the transfer amount.
- Credit Card Balance Transfer Basics
- 8 Questions to Ask Before You Transfer a Balance
- Best Balance Transfer Credit Cards
Cash Advance
A cash advance is another type of credit card transaction where you withdraw cash from an ATM using your PIN. Cash advances usually come with a fee, have no grace period, and have a higher APR than purchases or balance transfers. Because cash advances can be so expensive, it's seldom (if ever) a good idea to take out a credit card cash advance.
Past Due
Past due is an account status that means you're behind on your minimum payment. Your account becomes past due when you pay less than the minimum payment or if you don't make a payment at all. You'll be charged a late fee if your payment is just a few minutes past due. After becoming 30 days past due, your past due status will be reported to the credit bureaus. At 60 days past due, your card issuer may impose a penalty or default rate. Finally, if your account reaches 180 days past due, it will typically be charged-off and sent to another department or company for further collection.
Credit Reporting
Most credit card issuers report your account activity to companies known as credit bureaus or credit reporting agencies. These bureaus collect information on millions of consumers and compile a credit report for each consumer. Then, businesses like your credit card issuer or a lender or even an employer, can purchase a copy of your credit report and use it to evaluate you as a candidate. Businesses must have a "permissible purpose" before pulling your credit report.
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