15 Credit card terms you should know
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If you do not know the proper jargon, credit card offers and statements can lead you to outrageous debt and cause a lot of stress. To help you handle the situation better, here are fifteen frequently used credit card terms.
Average Daily Balance -- The average daily balance is the preferred method by which credit card companies calculate your payment due. It is formulated by adding every day's balance and then dividing the total by the total number of days in the billing cycle. This average daily balance is then multiplied by the credit card's monthly periodic rate, which is determined by dividing the annual periodic 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.
Annual Percentage Rate (APR) -- The yearly rate of interest which includes fees and costs paid to obtain the loan. Lenders are obligated by law to show the APR. The annual percentage rate is calculated by taking the average compound interest rate over the term of the loan, that way borrowers can compare loans.
Balance Transfer -- A balance transfer is the act of moving your unpaid credit card debt from one credit card issuer to another credit card issuer. Credit card companies often offer very low rates to encourage incoming balance transfers and high fees to discourage outgoing balance transfers.
Cash Advance Fees -- A fee charged by the bank for using your credit card to obtain cash. This fee can be stated as a percentage of the amount withdrawn or a flat per-transaction fee. The fee may be expressed as "3%/$10". This simply means that the cash advance fee will be the greater of 3 percent of the cash advance amount or $10. The bank may limit the amount of that can be charged. The fee may then be directly deducted from the amount you received or the fee may be posted to your bill.
Card Holder Agreement -- The card holder agreement is the written statement that displays the terms and conditions of the credit card account. This agreement is required by the Federal Reserve regulations. By law, the card holder agreement must include the Annual Percentage Rate (APR), annual fee if applicable, the monthly minimum payment formula, and the customers rights when disputing billing matters. Changes to the card holder agreement can be made at anytime by the issuer with a written advance notice. The rules for making changes to the card holder agreement vary from state to state. The rules that apply are the rules in the home state of the issuer, not those of the card holder.
Finance Charge -- The charge of using the credit card. The finance charge consist of interest cost and other kind of fees.
Floor -- This is the minimum possible rate on a line of credit or variable-rate loan, after the introductory rate period.
Grace Period -- if a card does not carry a balance, the grace period is the interest free time that a lender allows between the transaction date and billing date. The standard grace period is usually between 20 and 30 days. If no grace period is present, finance charges will accumulate the moment a purchase is made using the credit card. If you carry a balance on your credit card, you have no grace period.
Minimum Payment -- The minimum amount that a cardholder must pay in order to keep the account from going into default. Some card issuers will set a very high minimum if they are unsure of the cardholder's ability to pay. A lot of the credit card companies require a minimum payment of 2 percent of the outstanding balance.
Over-the-limit Fee -- The fee charged for going over your credit card limit.
Periodic Rate -- The interest rate expressed in relation to a specific amount of time. A monthly periodic rate is the cost of credit per month; a daily periodic rate is the cost of credit per day.
Pre-approved -- This term only means that a potential customer has passed the preliminary credit information screening. Credit card companies often send out "pre-approved" junk mail in order to get new customers. The credit card companies can then reject the customers if they don't like their credit rating.
Secured Card -- A special credit card that the cardholder secures with a deposit to ensure payment of outstanding balance in case of non-payment. This is mostly used by people new to credit, or people who are trying to rebuild their credit.
Teaser Rate -- This is also called the introductory rate, it is normally bellow the market-suggested interest rate. It is offered in order to attract customers and make them switch credit cards or lenders.
Variable Interest Rate -- The percentage that a borrower pays for the use of money. The variable interest rate moves up and down periodically based on the changes in other interest rates.
Posted by jonathan on March 01, 2005 at 12:30 PM