Credit card terms
The language of credit cards can be very confusing. From A to Z, here are few important terms that can help you maintain healthy credit.
| Adjusted balance | A method used by some card issuers in which they subtract all payments made during the month, then add the finance charges. |
| Annual fee | A bank charge for the use of a credit card levied each year, which can range from $15 to $300, billed directly to the customer’s monthly statement. Many credit cards come without an annual fee. |
| Annual Percentage Rate (APR) | The interest rate reflecting the total yearly cost of the interest on a loan expressed as a percentage rate. Under the federal Truth in Lending Act, it must be calculated in a standard way to allow consumers to make ‘apples to apples’ comparisons of lending terms. |
| Average daily balance | This is the method by which most credit cards calculate your payment due. An average daily balance is determined by adding each day’s balance and then dividing that total by the number of days in a billing cycle. The average daily balance is then multiplied by a card’s monthly periodic rate, which is calculated by dividing the annual percentage rate by 12. A card with an annual rate of 18 percent would have a monthly periodic rate of 1.5 percent. If that card had a $500 average daily balance, it would yield a monthly finance charge of $7.50. |
| Balance transfer | The process of moving an unpaid credit card debt from one issuer to another. Card issuers sometimes offer teaser rates to encourage balance transfers coming in and balance transfer fees to discourage them from going out. |
| Balance transfer fee | A fee charged customers for transferring an outstanding balance from one card to another. |
| Bankruptcy | The last resort for a borrower. If the borrower has difficulty meeting rent or mortgage payments and is extended beyond the credit limit, and the collection agencies are uncooperative, the borrower may need to file for protection. There are two basic ways of filing for personal bankruptcy. A Chapter 7 bankruptcy declaration gets rid of all debts (except some taxes and maybe alimony payments); Chapter 13 allows a borrower with a steady income to pay off bills over a 36- to 60-month period. It’s a serious step for a borrower because it severely limits access to credit for years to come. |
| Billing cycle | The number of days between the last statement date and the current statement date. |
| Billing statement | The monthly bill sent by a credit card issuer to the customer. It gives a summary of activity on an account, including balance, purchases, payments, credits and finance charges. Important changes to a credit card account are often included in small-print fliers that are sent with the statement. |
| Card holder agreement | The written statement that gives the terms and conditions of a credit card account. The cardholder agreement is required by Federal Reserve regulations. It must include the Annual Percentage Rate, the monthly minimum payment formula, annual fee, if applicable, and the card holder’s rights in billing disputes. Changes in the cardholder agreement may be made, with written advance notice, at any time by the issuer. Rules for imposing changes vary from state to state, but the rules that apply are those of the home state of the issuing bank, not the home state of the cardholder. |
| Cash advance fee | A charge by the bank for using credit cards to obtain cash. This fee can be stated regarding a flat per-transaction fee or a percentage of the amount of the cash advance. For example, the fee may be expressed as follows: “2%/$10″. This means that the cash advance fee will be the greater of 2% of the cash advance amount or $10. The banks may limit the amount that can be charged to a specific dollar amount. Depending on the bank issuing the card, the cash advance fee may be deducted directly from the cash advance at the time the money is received or it may be posted to your bill as of the day you received the advance. The cost of a cash advance is also higher because there generally is no grace period — interest accrues from the moment the money is withdrawn. |
| Cash Cards | Cash cards, similar to pre-paid phone cards, contain a set amount of value, which can be read by a special cash card reader. Participating retailers will use the reader to debit the card in increments until the value is gone. The cards are like cash — they have no built-in security, so if lost or stolen, they can be used by anyone. |
| Charge card | A card that requires full payment of the charge by the due date. Unlike credit cards, which give borrowers a revolving line of credit and lets them borrow against it, carrying a balance with an agreed-to interest rate, charge cards do not allow carrying a balance and no interest is charged. American Express and Diner’s Club are examples of charge cards. |
| Consumer Credit Counseling Service (CCCS) | A service that offers debt counseling with the goal of ensuring that debts are paid back over time. |
| Credit bureau (credit reporting agency) | A company that collects and sells information about how people handle credit. It issues credit reports that list how individuals manage their debts and make payments, how much-untapped credit they have available and whether they have applied for any loans. The reports are made available to individuals and to creditors who profess to have a legitimate need for the information. The three major national credit bureaus are Equifax, Experian (formerly TRW) and Trans Union. |
| Credit card | A plastic card that with a coded magnetic stripe that, when signed, entitles its bearer to a revolving line of credit, whose size and interest rate are determined by the borrower’s income and credit report. Credit cards began in the late ’40s when banks began giving out paper certificates that could be used like cash in local stores. The first real credit card was issued in 1951 by Franklin National Bank in New York. |
| Credit insurance | A policy that pays off the card debt should the borrower lose his job, die or become disabled. The structure of protection for a revolving credit card debt is calculated each month to cover only the debt that existed at the last billing cycle. |
| Credit limit | The maximum amount of charges a card holder may apply to the account. The Consumer Federation of America suggests people carry credit lines no greater than 20 percent of their gross household income. For example, people with a gross income of $50,000 would cap credit lines at $10,000. |
| Credit report | The credit report often is a critical factor in credit scoring systems that lenders use to issue credit cards, mortgages or other loans. It is a good idea to check your credit report to know where you stand and correct any errors. If you’ve made mistakes in paying previous loans, bounced checks, made late payments or had other problems, you may be able to correct them — or at least reduce the amount of damage they will do to your credit. If someone else has made a mistake that ended up on your credit, you want to get it removed. To make certain your credit reports are accurate, it is a good idea to check with the three major national credit bureaus: Equifax, Experian(formerly TRW) and Trans Union. |
| Debit card | A bank card with direct access to a card holder’s account, usually a checking or savings account. The card acts like a check with the money withdrawn from the existing account balance. The withdrawal of funds is immediate with online debit cards, delayed a day or two with offline debit cards. Cards that carry the logo of either MasterCard or VISA can be used at any location that displays the network’s logo. |
| F (Fixed) | If the letter “F” appears after the annual percentage rate (APR) the interest rate is fixed and not subject to adjustment. |
| Fair Credit Billing Act | Passed by Congress in 1975 to help customers resolve billing disputes with card issuers. Disputes include everything from computational errors and incorrect charges to the crediting of payments. The act requires issuers to credit payments to a customer’s account the day they are received. To be protected under the law, the consumer must write to the issuer within 60 days of the mailing date on the bill with the error. The issuer is then required to investigate and either correct the mistake or explain why the bill is correct within two billing cycles. The issuer also must acknowledge a customer’s complaint in writing within 30 days. Each issuer is allowed to set specific payment guidelines. If any of the guidelines are not met, the issuer can take as many as five days to credit the payment. |
| Finance charge | The charge for using a credit card, comprised of interest costs and other fees. |
| Foreign currency surcharge | A new charge imposed by some credit card issuers that imposes a fee on purchases made in a foreign currency. |
| Grace period | If the credit card user does not carry a balance, the grace period is the interest-free period of time a lender allows between the transaction date and the billing date.The standard grace period is usually between 20-30 days. If there is no grace period, finance charges will accrue the moment a purchase is made with the credit card. People who carry a balance on their credit cards have no grace period. |
| Household income | The total income of all members of a household. An important yardstick used by credit card issuers evaluating applications for joint credit. |
| Interest rate | The fee charged form money lent. Under the Truth in Lending Act, it must be disclosed as an APR to credit card users on the card application form. |
| Introductory (or intro) rate | The low rate charged by a lender for an initial period to entice borrowers to accept the credit terms. After the introductory period is over, the rate charged increases to the indexed rate or the stated interest rate. Often called a teaser rate. |
| Joint credit | Issued to a couple based on both of their assets, incomes and credit reports. It generally results in a higher credit limit, but makes both parties responsible for repaying the debt. |
| Late payment fee | Charge to customer whose monthly payment has not been received as of the due date or stated deadline for payment as shown on the billing statement. This fee can be stated in terms of a flat per-transaction fee or a percentage of the amount of the cash advance. |
| Minimum payment | The minimum amount a card holder can pay to keep the account from going into default. Some card issuers will set a high minimum if they are uncertain of the card holder’s ability to pay. Most card issuers require a minimum payment of 2 percent of the outstanding balance. |
| Monthly periodic rate | The interest rate factor used to calculate the interest charges on a monthly basis. The factor equals the yearly rate divided by 12. See periodic rate. |
| National Foundation for Consumer Credit (NFCC) | A non-profit organization that educates consumers about using credit wisely. The NFCC is the parent group for Consumer Credit Counseling Service. |
| Offline debit card | A new development in cards that share traits of both ATM and credit cards. Offline debit cards have the VISA or MasterCard logo on them and can be issued by a bank, either instead of or in addition to an ATM card. These cards can be used at any establishment which displays the VISA or MasterCard logo, but using them doesn’t access a line of credit — it debits a customer’s checking account. It is “offline” because the account isn’t directly accessed — there’s a delay of 24 to 72 hours before the debit is made in the account. If you sign a slip of paper to conclude the transaction, it was offline. In the U.S., no Personal Identification Number (PIN) is required to use an offline debit card. |
| Online debit card | An online debit card deducts funds from the bank account immediately, as soon as the card is used. It may have the VISA or MasterCard logo, or only the issuing bank’s logo, like an ATM card. There is no delay for processing the transaction — the money is immediately deducted from your account. In the U.S., if you entered a Personal Identification Number (PIN)during the transaction, it was online. |
| Over-the-limit fee | A fee charged for exceeding the credit limit on the card. |
| Penalty rate | Several percentage points higher than a card’s current annual percentage rate, which goes into effect after two late payments. On some cards, a single late payment triggers a penalty rate. |
| Periodic rate | The interest rate described in relation to a specific amount of time. The monthly periodic rate, for example, is the cost of credit per month; the daily periodic rate is the cost of credit per day. |
| Personal Identification Number (PIN) | As a security measure, some cards require a number to be punched into a keypad before a transaction can be completed. The number can usually be changed by the card holder. |
| Point of sale (POS) | An increasingly popular way for consumers to avoid ATM surcharges is to get cash returned from their online debit card via a cash return at the point of sale — such as a grocery store. |
| Pre-approved | A credit card offer with “pre-approved” only means that a potential customer has passed a preliminary credit-information screening. A credit card company can reject the customers it invited with “pre-approved” junk mail if it doesn’t like the applicant’s credit rating. |
| Previous balance | A method used by some card issuers where they base their finance charges on the amount owed at the end of the previous billing cycle. |
| Prime rate | The interest rate a bank charges to its best or “prime” customers. Each bank will quote a prime lending rate. Many institutions quote prime rates established by large money center commercial banks such as Citibank or Chase Manhattan. There is also a prime rate average listed in the Wall Street Journal that is an average of the largest commercial banks. The rate given to consumers on their credit cards is often based as the prime rate plus a certain percentage, which represents the lender’s assessment of the risk in lending, plus its profit margin. |
| Revolver | A term credit card issuers use for card holders who roll over part of the bill to the next month, instead of paying off the balance in full each month. About seven out of 10 card holders revolve the debt. |
| Revolving line of credit | An agreement to lend a specific amount to a borrower, and to allow that amount to be borrowed again once it has been repaid. Most credit cards offer revolving credit. |
| Secured card | A credit card that a cardholder secures with a savings deposit to ensure payment of the outstanding balance if the cardholder defaults on payments. It is used by people new to credit, or people trying to rebuild their poor credit ratings. |
| Smart card | Smart cards, sometimes called chip cards, contain a computer chip embedded in the plastic. Where a typical credit card’s magnetic stripe can hold only a few dozen characters, smart cards are now available with 16K of memory. When read by a special terminal, the cards can perform a number of functions or access data stored in the chip. These cards can be used as cash cards or as credit cards with a preset credit limit or used as ID cards with stored-in passwords. While fairly common in Europe, the United States has been slower to embrace them — Americans are happy with their ATMs and POS terminals, so merchants haven’t seen the need to make the expensive switch to smart card terminals. |
| T (tiered) | If the letter T appears after the annual percentage rate (APR), the interest rate is based on tiered pricing, with different periodic rates applied to different levels of the outstanding balance. The rate shown applies to the lowest of the balance tiers. |
| Teaser rate | Often called the introductory rate, it is the below-market interest rate offered to entice customers to switch credit cards. |
| Truth in Lending Act | A federal law that requires lenders to provide certain information so borrowers can compare one loan to another. The most important facts lenders must provide are: finance charges in dollars and as an annual percentage rate (APR); the credit issuer or company providing the credit line and the size of the credit line; length of grace period, if any, before payment must be made; minimum payment required; any annual fees; and fees for credit insurance, if any. |
| Two-cycle billing | With the two-cycle method, the average daily balance is calculated from two billing cycles rather than one and finance charges are typically higher This method, in effect, wipes out the grace period for customers who carry a balance. If the bill is not paid in full at the first billing, interest becomes retroactive back to the purchase date. Most credit card issuers use the single-cycle average daily balance method to calculate finance charges. |
| Unsecured debt | Debt that is not guaranteed by the pledge of any collateral. Most credit cards are unsecured debt, which is the main reason why their interest rate is higher than other forms of lending, such as mortgages, which employ property as collateral. |
| V (variable) | If the letter V appears after the annual percentage rate (APR) the interest rate is variable and subject to change. |
| Zero balance | What shows on a credit card customer’s bill when the outstanding balance has been paid and no new charges have been incurred during the billing cycle. |
