12 Important Credit Card Terms or Terminology You Need to Know

(April 12th, 2007)

When you sign up for a new credit card, the issuer will make you sign pages and pages of documents with sophisticated financial and credit card jargon that you probably have no idea about. Don't worry, in this page, we will define 13 common credit card terms that you will find in almost any credit card agreement. Therefore, before you sign that next credit card agreement, do read all the fine print and ask questions if you do not understand a term!

1) Annual Fee

Annual fee is the bank charge you have to pay each year for use of your credit cards. Sometimes also known as a membership or participation fee, the annual fee ranges from $15 - $300 a year. In present day and age, many issuers are offering credit cards without an annual fee to attract more signups. Therefore, compare and choose a credit card without an annual fee next time you are out!

2) Annual Percentage Rate (APR)

The APR is the annual interest charged on your use of your credit cards including any fees and costs paid to acquire the loan. Credit card issuers are obligated to tell you the exact APR you will be paying on your credit card.

3) Average Daily Balance

Average Daily Balance is used to determine the interest payments you will be making on your debt owed every month. The formula is:

Average Daily Balance = (Annual Percentage Rate (APR) / 12 months of the year) x Debt Owed

For example, if you owed $5000 in credit card debt and the APR charged is 15%, then the finance (interest) charge would be:

Average Daily Balance = (15% / 12 months) x $5000
Average Daily Balance = (1.25%) x $5000
Average Daily Balance = $62.50

4) Balance Transfer

Balance transfer is the process of moving unpaid credit card debt owed from one issuing company to another issuing company. Credit card issuers sometimes offer very low interest rates to encourage people to transfer their debt balances owed to their company. Many card issuers also have balance transfer-out fees that discourage people from moving their balances from one issuer to another.

5) Cash Advance Fee

When you withdraw money from the ATM using your credit card, your bank will charge you a Cash Advance fee. This fee is usually a % of the cash advance amount you withdraw from the ATM. For instance, the fee may be expressed as "2%/$12" This means you will be charged 2% of the cash amount you withdraw, or $12, whichever is higher.

6) Credit Limit

This is the total maximum amount of money you can borrow from your credit card, at any given point in time.

7) Finance Charges

There are different finance charges for any balance-transfers, cash advances and regular usage of credit. Make sure you read the fine print of your credit card agreement or ask your issuer of the exact finance charges you will have to pay on any of these above items.

8) Grace Period

Grace period is the interest-free period for a borrower between the time he makes a transaction and till billing time. Grace period usually lasts 20-30 days within which you won't get charged interest. If your issuer has no grace period, your interest payments begin the day you use your credit card for any purchases.

9) Introductory Rate

Introductory interest rate is a teaser low interest rate that lenders use to encourage new customers to transfer their balances to their company or switch their card issuers. Make sure you do not get carried away with the introductory interest rates, but ask for the actual APR you will be paying.

10) Pre-Approved

If you get a mail saying you've been pre-approved for a $14000 credit card or something, know that pre-approval only means you've passed a preliminary credit screening test. Your card issuer can still decline your application if your credit score is too low (you are not a good risk for lending money to).

11) Secured Credit Cards

Secured credit cards are types of credit cards that are bonded with your savings deposit accounts. If the borrower defaults on the monthly debt payments required on the card, the issuer can withdraw the balance from the attached savings deposit account. Secured cards is used by people trying to rebuild their credit or new to credit.

12) Universal Default

This is a universal interest rate that all card issuers can impose on borrowers if they are 30 days or more late for payment. For example, if you owe $500 in credit card debt and have made no payments for 30 days or more, the issuer can skyrocket your interest rate to 20-35%. Read the fine print of your credit card agreement, it will say whether your issuer has the right of Universal Default or not.