Here's
some important terms you should know before you apply... Catchy
credit card promotions can be found almost everywhere you look. But no matter
which offer you choose, make sure you understand all the important terms and conditions
first. You can locate the 'terms and conditions' in the cardholder agreement
of any credit card application. By law it must include the APR; the minimum payment
formula; annual fee, if applicable; and the cardholder's rights. Let's talk
about the details so you know what to look for: General Credit Card
Terms
Although it may seem confusing, understanding the basic terminology
included in a credit card application can help make the process of choosing and
using credit cards easier. Here's an overview of some of the most important terms
you should know:
Annual Percentage Rate (APR)
- This is the interest you'll pay (over one year) for the cost of borrowing. The
higher the number the more money you'll pay over time. Interest begins to
accrue when you carry a balance and is calculated based on the specific offer
terms: - Teaser Rate - Also called the introductory rate, the
'teaser' is a promotional rate - often as low as 0% - offered for a limited time
to entice customers to switch credit cards or lenders.
- Variable Rate
- After the teaser rate, a variable rate moves up or down based on the prime rate
or other indexes.
- Fixed Rate - After the teaser rate, your rate
remains at a specified 'fixed rate' until notified of changes by the issuer.
-
Tiered APR - Different rates are applied to different levels of the outstanding
balance (for example, 16% on balances of $1–$500 and 17% on balances above $500).
- Penalty APR - An increase in your APR as a penalty when a payment
is late or missed.
- Delayed APR - A different rate will apply in
the future. For example, a card may advertise that there is “no interest until
next March.” Look for the APR that will be in effect after March.
Available
Credit - Available Credit is the amount of credit you have available to
use for purchases, balance transfers and cash advances. Annual Fee
- A set fee charged annually by a credit card company to use their card. Although
many companies offer cards with no annual fee, they can start charging one without
notice - at any time. Balance Computation Method - Credit
card issuers have a variety of ways of calculating interest charges, with some
being more costly than others. Here are the most common types and how they work: - Average
Daily Balance - The most common way to calculate interest. The issuer adds
what you owe at the end of each day and divides by the number of days in the period.
- Adjust
Balance - Determines interest by subtracting all payments from the previous
balance. It does not factor in new charges - so it's the most favorable method.
- Previous
Balance - Takes the outstanding balance from the previous period and applies
interest to the total. Charges in the current period are not included - 2nd most
favorable method.
- 2-Cycle Average Daily Balance - Less common,
but most expensive computation method. Uses the average daily balance from the
previous two billing cycles.
Credit Limit - Your credit
limit is the amount the credit issuer will allow you to borrow using their credit
card. The better your credit history the higher your credit limit will be. Finance
Charges - The finance charges include all interest, fees and penalties
that are charged over the billing cycle. It varies depending on what services
were used and the balance of the account. Grace Period - The
interest-free period of time lenders allow between the transaction date and the
billing date - usually between 20 and 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. Minimum
Monthly Payment - The minimum monthly payment required to keep the account
in good standing, typically 2 to 3% of the balance.
Penalties
& Fees
Late Payment Fee - A fee charged
to a cardholder's account once a payment is overdue. Over-the-Limit
Fees - A fee charged any time you exceed the credit limit on your card.
Beware, you can be charged multiple times if you make several purchases after
the limit has been exceeded.
Credit Card Services
Many
additional services are provided by credit card companies as a 'convenience' to
customers. But be aware - they often carry hefty fees. Balance
Transfers - The process of moving a part or an entire balance from one
credit card to another, often to take advantage of a lower interest rate offer.
A fee will be charged for making the transfer and may also carry a higher interest
rate. Cash Advance - The option to take all or part of your
approved credit limit as cash - available by using a check provided by the credit
issuer. Higher interest and fees apply to cash advances. Convenience
Checks - Checks offered for times when a credit card is not accepted.
These also subject to fees and higher interest.
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