Confused by the official-looking, scary-sounding, stress-inducing language on your credit card statements or the credit card offers you get in the mail? You’re not alone.
According to creditcards.com, four out of five Americans don’t possess the reading skills required to understand credit card agreements.
A lot of experts think credit card companies intentionally make their documents hard to understand. The less consumers understand about interest rates and fees, the more likely it is that they’ll end up paying more than they need to in order to borrow money.
We don’t want you to pay an extra penny, so with the help of Bruce McClary, Vice President of Communications at the National Foundation for Credit Counseling, here is the most common credit card terminology, explained.
The yearly charge some companies add onto your credit card statement in return for managing your account.
“Look around before getting a card with a fee,” Bruce says. “Can you find equivalent without fees?”
An annual fee may be hard to avoid if you’re using a credit card that offers rewards. “Rewards may be worth it if you pay off balances fast and use the card enough to generate rewards,” Bruce says. “You have to figure out if the rewards offset what you pay in fees.”
APR (Annual Percentage Rate)
The yearly interest rate used to calculate how much in interest charges will be tacked onto the consumer’s statement each month the balance isn’t paid in full by the due date.
The APR on your credit card is determined in part by your credit score and history. Lenders assign APRs based on how risky they think it is to loan you money. The lower your credit score is, the higher your APR may be.
“For example, the average APR this week according to creditcards.com is 15 percent,” Bruce says. “Your credit card, however, may have a 25 percent APR.”
In this scenario, the consumer has a higher APR because the lender thinks loaning this person money is riskier than loaning money to the average person.
The process of moving an unpaid credit card (or credit cards) debt from one company (Company A) to another (Company B).
Company B will essentially pay off the balance you owe to Company A.
That balance doesn’t just disappear though—you’ll start making payments to Company B instead of Company A.
A balance transfer may be a good financial move if Company B offers a lower APR than Company A, and you can pay off the balance during the introductory transfer rate period (often six months to 18 months).
Company B will often charge you a one time fee for paying off your debt to Company A, usually 3 percent of the amount transferred.
Your credit history is a snapshot of your financial situation that includes how much debt you carry from a variety of sources (credit card companies, home loans, auto loans, student loans, etc.) and how timely (or not) you’ve been in the past when it comes to paying off these loans.
By law, Americans can request their own credit reports for free once per year from the three big credit bureaus (Experian, TransUnion, and Equifax).
The credit limit is the maximum amount of money you can spend on a credit card. If you go over this amount, the lender will usually charge you a fee.
Getting close to your credit limit may negatively impact your credit score. “It’s hard to pinpoint exactly how close you can get to your credit limit without it hurting your credit score,” Bruce says. “To play it safe, you’d want to only use about 20 to 40 percent of your available credit. The closer you get to the credit limit, the more it makes you look like a risk because you’re in danger of going over.”
Your credit score is a method used by credit bureaus to help lenders determine how likely it is that you’ll pay off your debt in a timely fashion. Each bureau uses a different formula to arrive at a score ranging between 300 and 850 (the higher the number, the better). The lower your credit score is, the higher your APR will be.
“Part of your credit score is the types of loans you have and how you’re managing them,” Bruce says. “You don’t want to only have credit card loans, or only student loans. It’s best to have a few credit cards, and maybe an auto loan and student loan. If you start getting too many loans of one type, then it shows your appetite for a certain type of credit is growing out of proportion.”
Don’t think, “Duh…it’s the date I have to pay by.”
“This is the date your payment needs to be applied to your account,” Bruce says. “It has to clear your bank by the end of business on this date in the time zone your creditor is located in.”
All banks and creditors vary when it comes to how fast they process e-payments.
If you make an online payment through your bank, it will likely still take 1-2 days until it’s applied to your credit card account.
“Paying through the web site of a creditor may be faster,” Bruce says. “But don’t cut it so close that it’s ever a question of when the credit card company will receive your money.”
If a payment isn’t applied to your account by the due date, you’ll likely be charged a $25-$35 late fee (although some credit card companies don’t charge late fees).
Your credit card company may also raise your APR as high as 29.99 percent for paying late.
Late payments may also be reported to the three credit bureaus, leaving a nasty mark on your credit history and credit score.
The extra money you pay in addition to the amount you borrowed.
Finance charges are how credit card companies make money.
Finance charges include interest and other fees. Companies use different types of methods to calculate finance charges.
The most common type of finance charge is determined by the APR on your credit card, the number of days in the billing cycle, and the credit card balance.
“Let’s say you have an APR of 15 percent,” Bruce says. “To figure out how much your interest will be, you want to divide 15 by 12, because there are 12 months in a year. That gives you 1.25 percent. Companies then look at the average daily balance you carried over the 28-day billing period. They’ll charge you a 1.25 percent fee on that number.”
The days or weeks during which no interest or fees are charged on new credit card purchases.
Grace periods often start on the first day of a billing cycle, and end a certain number of days later, usually 21-25 days.
“Some creditors don’t offer grace periods,” Bruce explains. “Others wait a week or two or until the end of the billing cycle before they’ll start charging interest.”
Cash advances don’t have a grace period—you’ll start paying interest the day of the transaction.
The APR you will be charged for the first few months or years of using a credit card. Companies often offer low or 0 percent interest during the introductory period. Once the introductory period ends, the APR adjusts to a different rate, sometimes higher than the national average.
The amount you must pay every month to avoid having the account go into default. Companies usually require a monthly payment of 2 percent of the balance.
Additional charges assessed by companies for various reasons, including making a late payment, using the credit card to obtain cash from an ATM, or exceeding one’s credit limit.
The CARD Act of 2009 made credit card statements a lot more transparent, and their terms easier to understand. But there’s still a lot of jargon out there—if you understand what the terms on your credit card statement mean, you’re less likely to incur unnecessary fees and interest.