28 Essential Credit Card Terms

Cryptic vocabulary makes interpreting credit card contracts difficult. Happily, you will find most of
the terms credit card issuers use right here. Refer back to this glossary whenever you need help
determining the meaning of creditor jargon.

Terms common to credit card contracts:

Annual fee Annual percentage rate, or APR Average daily balance

Balance transfer
Cash-advance fee
Debit Card
Grace period
Minimum payment
Periodic rate
Purchases/new charges
Truth in Lending Act
Variable interest rate
Balance transfer fee Billing cycle
Credit limit Daily periodic rate
Fair Credit Billing Act Finance charge
Introductory rate Late payment fee
Over-the-limit fee Payment due date
Preapproved Previous balance
Rebate card Secured card
Two-cycle billing Universal default

Annual fee -- A bank charge imposed each year for use of a credit card. It may also be called a
membership or participation fee. It can range from $15 to $300 and usually gets billed directly to
the customer's monthly statement. Many credit cards come without an annual fee.

Annual percentage rate, or APR -- A yearly interest rate that includes fees and costs paid to
acquire the loan. Lenders are required by law to disclose the APR. The rate is calculated in a
standard way, taking the periodic rate and multiplying it by the number of billing periods in a year.

Average daily balance -- A common calculation method used to determine the payment due. It's
determined by adding each day's balance and then dividing that total by the number of days in a
billing cycle. The average daily balance is then multiplied by a card's monthly periodic rate, which
is calculated by dividing the annual percentage 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.

Balance transfer -- The process of moving an unpaid credit card debt from one issuer to another.
Card issuers sometimes offer teaser rates to encourage balance transfers coming in and balance-
transfer fees to discourage them from going out. Make sure if you're making a balance transfer you
know exactly when the introductory rate expires.

Balance Transfer Fee - A fee that may be charged to cardholders for transferring a balance from
one card to another.

Billing cycle The number of days between the last statement date and the current statement date.

Cash-advance fee -- A charge by the bank for using credit cards to obtain cash. This fee can be
stated in terms of a flat per-transaction fee or a percentage of the amount of the cash advance. For
example, the fee may be expressed as follows: "2%/$10." This means that the cash advance fee will
be the greater of 2 percent of the cash advance amount or $10.

The banks may limit the amount that can be charged to a specific dollar amount. Depending on the
bank issuing the card, the cash advance fee may be deducted directly from the cash advance at the
time the money is received or it may be posted to your bill as of the day you received the advance.
The cost of a cash advance is also higher because there generally is no grace period. Interest accrues
from the moment the money is withdrawn.

Credit limit -- The maximum amount the card allows you to borrow.

Daily Periodic Rate

The interest rate factor used to calculate interest charges on a daily basis. The factor is computed by
dividing the yearly rate by 365 days. Used by the Discover card, but few other cards, this method of
computing interest can result in an effective annual percentage rate that is approximately 2% greater
than the yearly stated rate of interest.

Debit Card
A card that directly accesses the cardholder's account, providing payment for a transaction much
like writing a check. No credit is extended to the cardholder. No debt is incurred.

Fair Credit Billing Act - An Act passed by Congress in 1975 to help cardholders resolve billing
problems with issuers. The Act gave cardholder certain rights when dealing with credit card
issuers.

Finance charge -- The charge for using a credit card, comprised of interest costs and other fees.
Read the fine print. You may have different finance charges for cash advances and balance transfers.
You may also discover that if you pay off your balance each month, you will escape the finance
charge.

Most credit card issuers use the single-cycle average daily balance method to calculate finance
charges. Some, however, may use the double-billing cycle.

Grace period -- If the credit card user does not carry a balance, the grace period is the interest-free
time a lender allows between the transaction date and the billing date. The standard grace period is
usually between 20 and 30 days. If no grace period exists, 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.

Introductory rate -- Often called the teaser rate, it is the below-market interest rate offered to
entice customers to switch credit cards or lenders. Make sure to pay more attention to the regular
APR, which is the interest rate you'll be stuck with after the introductory rate expires.

Late payment fee -- The charge tacked on to tardy payments. Late penalties average from $30 to
$35 per month.

Minimum payment -- The minimum amount a cardholder must pay to keep the account from
defaulting. Usually this amount comes to 2 percent of the outstanding balance.

Over-the-limit fee -- The charge for exceeding the credit limit on the card. It generally costs around
$30 to $35.

Payment due date -- This does not mean the postmarked-by date, but the date by which the issuer
must receive your payment. Allow a mailed payment seven to 10 business days to get there. If you
pay online, find out how long payments take to process. Likely, it's not an instantaneous debit.
Periodic rate -- The interest rate relating to a specific amount of time. It's used to calculate the
finance charge for each billing period. The monthly periodic rate, for example, is the cost of credit
per month; the daily periodic rate is the cost of credit per day.

Preapproved -- A credit card offer proclaiming a potential customer is "preapproved" only means
that that person passed a preliminary credit screening. A credit card company can still reject the
same customer if it doesn't like the applicant's credit rating. To pay down your debt, you'll want to
pay as much of the balance as you can, if not all of it.

Previous balance -- The outstanding balance at the end of your last billing cycle. This amount
excludes payments made toward the balance.

Purchases/new charges -- The total amount of new debts incurred during the current billing cycle.
Different interest rates may apply to balance transfers and cash advances, so make sure the amounts
are correct.

Rebate Card A credit card that supplies benefits based upon the card's usage. Benefits are usually
in the form of services, such as airline tickets, discounts on future purchases, or cash refunds and
are based upon a percentage of the purchase amounts charged.

Secured card -- A credit card that a cardholder secures with a savings deposit to ensure payment of
the outstanding balance if the cardholder defaults on payments. It is used by people new to credit or
people trying to rebuild their poor credit ratings.

The interest rate on secured cards tend to be high -- between 13 percent and 24 percent -- so shop
around if it's your only card option.

Truth in Lending Act A federal law that requires lenders to provide certain information so
borrowers can compare one loan to another. The most important facts lenders must provide are:
finance charges in dollars and as an annual percentage rate (APR); the credit issuer or company
providing the credit line and the size of the credit line; length of grace period, if any, before
payment must be made; minimum payment required; any annual fees; and fees for credit insurance,
if any.

Two-cycle billing -- A billing method that calculates the average daily balance using two billing
cycles rather than one. Finance charges are typically higher. This method eliminates the grace
period for customers who carry a balance. If the bill is not paid in full at the first billing, interest
becomes retroactive back to the purchase date. For more information about two-cycle billing read
the Bankrate feature, "How 2-cycle billing works."

Universal default -- A policy some lenders apply to credit card users who pay any creditor at least
30 days late. The clause allows the issuer to impose a dramatically higher interest rate. Read the
fine print of your contract to see if your lender reserves that right.

Variable interest rate -- Percentage that a borrower pays for the use of money, and which
fluctuates periodically based on changes in an interest rate index.