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Last week, I gave six reasons you need a credit card right now. Then a friend mentioned she knew she needed a credit card, but didn’t know what half the credit card terms mean, let alone which card would be best for her. I realized I had missed a major detail when talking about credit cards. If you’re trying to learn about credit, you need to know what the heck everything means.
So today, I’m explaining what some of the most common credit card terms mean without all the technical jargon. It’s important to understand the terms so you can make smarter decisions when choosing and using credit cards.
Annual Percentage Rate (APR)
The most important thing you need to know and understand is your annual percentage rate. This is the interest rate you will be charged on your monthly balances if they carry over to the next billing cycle.
Your credit line is the maximum you can charge on your account. For your first credit card, your credit line may only be $500 to $1000. However, as your credit score raises and credit history lengthens, you may be offered higher lines of credit.
Your available credit is the amount you have left to charge on your card.
The balance on your credit card refers to how much you owe on the card. Your balance changes monthly based on your spending, payments, and interest charged.
The amount you still owe after making a payment. It could be $0 or $1,500.
Interest means so many things, but on a credit card, you will be charged interest based on your APR and balance. This is typically called a finance charge.
The monthly interest charge added to your credit account balance is known as a finance charge. In a simple sense, it’s calculated by multiplying your balance by the interest rate (your APR). Finance charges occur when you do not pay off the full balance on your card every month. Sometimes, on a new card, you will receive a promotional/introductory rate of 0% for a set number of months, in which you can carry a balance and be charged no interest. However, this will end when the promotion ends.
As mentioned above, sometimes when you get a new credit card, you are given an awesome introductory rate – typically 0%, for a set number of months. This means you will not be charged interest on balances carried over on each billing cycle. However, when the introductory rate ends, whatever remaining balance you have on the card will be charged at the original APR stated in your credit card terms.
The billing cycle is the time between billing statements. They’re usually 21-25 days apart. If you get hit with a finance charge, it will be based on how many days were in your billing cycle.
This is the lowest possible amount of money you are required to pay on your credit card balance each billing cycle. If you miss the payment or don’t pay the minimum, you will be charged fees and your credit score will plummet. NEVER MISS A PAYMENT. Also, if you only make the minimum payments on your card and allow interest to accrue, it will take a long time for you to pay off your balance, especially if you continue to charge more items.
The grace period is the time you are given to make your minimum payment after you receive your billing statement.
This is a fee tacked onto your balance if you miss a payment deadline. They are expensive. Pay on time and you’ll never have to see how expensive they can get. You can find how much a late fee is in your terms and agreement.
This is a fee for charging over your credit limit. Pretty self-explanatory. Don’t do it! It’s expensive and can be found in your credit card terms.
An annual fee is a yearly fee for owning a credit card. Nowadays, there is little reason to have a credit card with an annual fee. Many companies offer cards with no annual fee. If you do choose to get a card with an annual fee, make sure it offers some sweet benefits and rewards to make it worth your while.
A balance transfer is when you move a balance from one card over to another card. Typically, you get offers from credit card companies with no fee balance transfers and a new introductory rate. They’re great for people who have high balances on cards with high interest rates who are trying to get out of debt. A balance transfer could save you hundreds of dollars in interest, but make sure you understand the fees associated with a balance transfer.
A cash advance is when you use your credit card to attain cold hard cash. You can withdraw money with your credit card the same as a debit card, however, the interest rate on this cash is typically much higher than your credit charges. Usually it sits in the high 20’s. Your cash advance limit is also typically less than your actual credit line. Learn more about it in your terms and agreement, but I recommend NEVER taking a cash advance.
A credit bureau is an agency that collects information on your credit usage. You may know the three big dogs – Trans Union, Equifax, and Experian. These three companies can make your life hell or heaven.
I hope this list of credit card terms helps you better understand what companies are trying to sell you when it comes to reading your user agreement. If you have any questions, feel free to hit me up in the comments section!