Credit Card Terminology
5 minutes read
If you have credit, want credit, or simply exist in a world that uses credit, there are some words and phrases you'll want to know. Becoming familiar with these terms is important because the better your credit card vocabulary, the more informed you'll be about what goes on with your credit accounts. You will also find it easier to understand credit card-related articles, thereby improving your knowledge base.
Here is a list of standard credit card terms and what they mean:
Annual fees: an amount charged by credit card issuers for managing your account. Annual fees may range from $30 to over $500, and it is sometimes waived for your first year. Some credit cards do not charge annual fees at all.
Annual percentage rate (APR): this is the annualized interest rate that is charged on your outstanding balance every month. The lower your card's APR, the better.
Available credit: the amount of unutilized credit available on your account is known as available credit. You can calculate this by subtracting your balance from your credit limit.
Balance: this is the total unpaid amount on a credit account at any given time.
Balance transfer: a balance transfer involves moving the balance on one credit card (or more) to a new credit account. This is often done to consolidate debt on a new card and take advantage of a lower APR.
Cash advance: this is a cash loan taken against your credit account. To discourage cash withdrawals via credit cards, issuers often charge a higher APR for cash advances.
Cash back: some credit cards give back a percentage of your monthly (or quarterly) spending in cash. Cash back is the most popular type of credit card rewards.
Chip-and-PIN credit cards: require a personal identification number (PIN) as a secondary means to verify your identity.
Chip-and-signature credit cards: refers to cards that require a signature as a secondary means to your identity.
Credit bureau: these companies collect cardholders' payment behavior data. The information is then used to create credit reports. Equifax, Experian, and TransUnion are the three major credit bureaus.
Credit history: a record of how you managed credit in the past. Credit card companies consider your history before offering you credit.
Credit limit: the maximum amount you're allowed to charge on your credit card.
Credit report: your credit report is provided by credit bureaus. It details your payment behavior, credit history, and other pertinent financial/personal information.
Credit score/rating: your credit score or credit rating is a measure of your creditworthiness. The higher your score, the better your chances of getting new credit and more favorable terms from lenders.
Credit utilization ratio: describes how much credit you use in comparison to the total credit available to you—the lower the ratio, the better for your credit score.
Debt-to-income (DTI) ratio: compares all your debt (plus credit card debt) against your annual income. The smaller your debt burden and the bigger your income, the lower your DTI. The ratio affects your chances of getting new loans and the terms you're offered.
Dispute: if your credit card statement contains any error or irregular charges, you can file a dispute with the issuer within 60 days of getting the statement. They are required to rectify the error no later than 90 days later.
Due date: you're supposed to pay off your credit card balance by the due date every month. If you don't, you will be charged a late fee.
FICO score: your credit score, as measured by FICO—the leading credit scoring service in the US. Scores range from 300 to 850, and the higher your score, the better.
Foreign transaction fee: a small percentage (~3%) charged on international transactions (including foreign online payments).
Grace period: a 21-day period every month during which you can pay off your credit balance interest-free. Once it passes, interest starts accruing on your unpaid balance.
Hard inquiry: whenever you apply for new credit, the lender requests a copy of your credit report. This is called a hard inquiry, and it hurts your credit score.
Interest charges: this is the amount charged on your credit account if you don't pay off your balance within the grace period.
Introductory rate: some card issuers offer a 0% intro APR for a limited period (usually 12 to 21 months). During these months, you enjoy interest-free purchases and payments.
Issuer: an issuer is one of the financial institutions that issue credit cards, e.g., Citi, Capital One, or Bank of America. They are often confused with Visa or Mastercard; these are payment processing networks.
Late fees: a late fee is a penalty charged by issuers if you fail to make the minimum payment by the due date.
Minimum payment: an amount you must pay every month to avoid defaulting on your credit account.
Penalty rate: if you default on your payments or contravene the credit card issuer's regulations, you may end up being charged a penalty rate, which is a higher interest rate that's applied to your balance.
Reward credit card: a class of credit cards that reward consumers for frequent usage. The rewards may be in the form of cash, discounts, or travel benefits.
Secured credit card: a credit card that is backed by collateral (usually a cash deposit) is known as a secured credit card. They are designed for consumers with no credit history or bad credit, which helps to rebuild creditworthiness.
Soft inquiry: this describes a credit check that has no impact on your credit score. E.g., when a prospective employer/landlord requests a copy of your credit report.
Statement: a document that outlines all the activity on your card for a given billing cycle (27 to 30 days). It is sent to you by your card issuer, and it includes your purchases, withdrawals, transaction fees, interest charges, and so on.
Unsecured credit card: a credit card that does not require collateral is sometimes called an unsecured credit card. You qualify for these based on your credit score, credit history, DTI ratio, and other criteria.
The Bottom Line
Among other things, the 2009 CARD Act mandates card companies to make the terms and conditions on credit cards more transparent and easier to read. This, coupled with the list above, makes you more knowledgeable and better able to understand important information about your credit card and react accordingly.