Introductory APR? Credit limit? Balance transfer? Sometimes, credit card lingo can seem like it’s in a different language. Understanding these terms will help you make informed decisions about borrowing with your credit card — and keep from falling into debt. Read on to discover the meanings behind common credit card terminology.
An annual fee is the amount creditors charge yearly for managing your card. Not all cards have annual fees; others have annual fees, but they will waive them for the first year as an incentive to open an account. Annual fees are common with cards that have rewards, such as cash back or points. If you’re applying for a card like this one, make sure the rewards will offset the fees.
Annual Percentage Rate
Often known by its acronym, APR is the percentage rate the credit card company will charge yearly if you don’t pay off your card balance each billing cycle. There are a few variations of APRs, so read on for additional definitions. If you’re curious about your monthly interest rate, divide your APR by 12. For example, if your APR is 7%, your monthly interest rate will be .58%.
While a credit card company may advertise an APR, your credit score and history will determine your individual rate. If you have a low credit score, credit card companies see lending money to you as risky, so they’ll charge you a higher rate. In mid-April 2022, the average APR was 16.37% according to creditcards.com.
An APR may be fixed or variable. A fixed (or non-variable) APR doesn’t change with the prime interest rate (the interest rate creditors use for customers with good credit scores). Lenders may still change your rates based on your actions, such as paying late. However, they must notify you before changing your rate. A variable APR fluctuates with the prime rate and can change at any time, without warning.
Creditors may also offer an introductory APR as an incentive to open a credit card. This introductory rate may be zero or low, and it is usually available for a period of 12 to 21 months.
The balance is the amount of money you owe on your credit card statement. It includes the charges you make, as well as any interest that has accrued. The credit card company may also tack on fees, including for late payments and balance transfers.
A balance transfer is the process of moving unpaid debts from one credit card to another. This will pay off or reduce your balance on your first credit card and funnel the balance onto the second card. It’s a wise financial choice if the terms are better on the second card, for example, if the APR is lower. To incentivize balance transfers, companies often offer low or zero APRs for an introductory period of six to 18 months. If you can pay off the balance transfer within the introductory period, you’ll save money on interest. Take note: the credit card company may charge you a one-time balance transfer fee for moving your money. The average balance transfer fee is 3%. The balance transfer may also be subject to a different APR than your standard one.
The billing cycle is the time span between the closing date of the previous bill and the next statement issued. According to the CARD Act, this time span must be at least 21 days.
If you need cash, you can withdraw money from your credit card account. This is called a cash advance. The amount you are allowed to withdraw in cash is often the same as your credit limit. Keep in mind: cash advances are usually charged higher rates than your card’s usual APR and are subject to additional fees. It can be costly to take out a cash advance.
The credit limit is the maximum amount you’re able to charge on your credit card. You may also see the credit limit referred to as the spending limit. If you charge more than this amount, the lender will charge fees. Additionally, approaching and passing your credit limit will negatively impact your credit score. If you consistently pay your balance on time, the lender may offer to give you a higher limit.
Your card’s due date isn’t as simple as when you must pay. The due date is when your payment must hit your account. The time it takes banks and lenders to process your payment varies. An online payment, for example, may take one to two days to be applied to your account. If your payment is tardy, you may accrue a late fee.
Foreign Transaction Fee
If you make purchases outside the U.S., the credit card company may charge a foreign transaction fee to allow you to do so. The standard rate is 3% per transaction.
The grace period is the time between the end of a billing cycle and when your bill is due. During this time, most creditors don’t charge interest on the balance. The period varies; however, it must be at least 21 days from the end of the billing cycle. The grace period doesn’t apply to cash advances or balance transfers.
Late Payment Fee
The late payment fee is the fee you’ll face for paying your credit card bill after the due date. Late payment fees increase over time and with multiple late payments. Late payments may also cost you in other ways, such as causing your APR to increase or negatively impacting your credit score.
The minimum payment is the amount you must pay each month to keep your account current. Creditors will ask for a set amount, such as $25, or a percentage of your balance, such as 2%.
We hope explaining this credit card jargon helps you make informed borrowing decisions.