Glossary of Common Credit Card Terms

If you don't understand the language, you may be frustrated with credit card offers and statements. Here's what these frequently used credit card terms mean

Annual Fee

A fee charged once a year for maintaining an account and for any special services.

Annual Percentage Rate (APR)

A yearly rate of interest that includes fees and costs paid to acquire the loan. The rate is calculated in a standard way, taking the average compound interest rate over the term of the loan, so borrowers can compare loans.

Available Credit

The amount of unused credit available. Available credit is computed by subtracting the outstanding balance from your total credit line.

Average Daily Balance

An average daily balance is determined by adding each day's balance and then dividing that total by the number of days in a billing cycle. This is the method by which most credit cards calculate your payment due, in which the average daily balance is then multiplied by a card's monthly periodic rate. For example, a credit card with an annual rate of 12 percent would have a monthly periodic rate of 1 percent. If that card had a $500 average daily balance it would yield a monthly finance charge of $5.00.

Balance Transfer

The process of moving an unpaid credit card debt from one issuer to another, ideally with a lower cost. Credit card issuers sometimes offer introductory rates to encourage balance transfers.

Billing Cycle

The number of days in the billing period. It includes the day after the previous close date through the current closing date of the account.

Cash Advance

Cash withdrawn from the available credit of your credit card account. There is no grace period for cash advances. Interest accrues daily and at a higher APR until the complete balance is paid in full.

Cash Advance Check

A cash advance check works like a personal check except the amount is charged to your credit card account. This check can be written to your choice of recipients and for any amount up to your available credit limit. These types of checks are posted as cash advances and will incur a transaction finance charge.

Cash Advance Transaction Finance Charge

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.

Credit

Credit is a promise to repay a debt for purchases you make. It allows you to buy something today and pay for it later.

Credit Bureau

A credit-reporting agency that checks credit information and keeps files on people who apply for and use credit. The Credit Bureau produces a Credit Report, which is a record of a consumer’s level of indebtedness and bill paying behavior. The agencies compile the report and release it to lenders and others as permitted by law.

Credit Limit

Also known as Credit Line, this is the maximum amount you can carry as the balance on your credit card. If you exceed this amount, an Over-the-Credit-Limit-Fee may be imposed.

Credit Score

Also known as a credit rating. Many lenders use this numeric calculation of your credit report to obtain a fast, objective measure of your credit risk, and consider your score when deciding whether or not to approve a loan.

Finance Charge

The charge for using a credit card, comprised of interest costs and other fees.

Float

When a cardholder makes a purchase or obtains an advance, the transactions may not post for a few days. The charge amount is not added to the balance of the account until the transaction does post. The time between purchase and posting is referred to as the float.

Grace Period

The period between the date of the credit card billing statement and the date payment in full must be received before interest begins to accrue on new purchases.

Interest

Also known as a finance charge, interest is the fee for borrowing money. Interest is listed on your credit card statement as the Monthly Finance Charge.

Interest Rate

The percent, per unit of time, that a bank or financial institution charges a customer for borrowing money. See Annual Percentage Rate.

Introductory Rates

It is the below-market interest rate offered to entice customers to switch credit cards or lenders. Credit card issuers often offer lower introductory APRs as special promotional offers. After a period of time, the rate usually returns to the standard rate.

Issuer

An issuer (or issuing member) is a financial institution which issues credit cards such as Visa® or MasterCard®.

Late Payment Fee

The charge that may be imposed if the Minimum Monthly Payment is not received by the Payment Due Date.

Monthly Finance Charge

If your credit card balance is not paid in full, you will be charged a Monthly Finance Charge. The charge is calculated on the statement closing date by multiplying the Average Daily Balance on the account by the Monthly Finance Charge rate (the Annual Percentage Rate divided by 12).

Minimum Monthly Payment

The minimum dollar amount that must be paid each month to prevent a credit card account from being delinquent. The amount is based on the percentage of your Outstanding Balance or a minimum fixed amount.

Outstanding Balance

The amount you owe on your credit card. This is the balance used to calculate payments and on which interest is charged.

Over-the-Credit-Limit-Fee

A fee charged for exceeding the credit limit on the card.

Payment Due Date

The date when your payment must reach your bank to avoid a late payment fee (if applicable).

Periodic Rate

The interest rate described in relation to a specific amount of time. The monthly periodic rate, for example, is the cost of credit per month; the daily periodic rate is the cost of credit per day.

Pre-approved

A credit card offer with "pre-approved" only means that a potential customer has passed a preliminary credit-information screening. After further credit evaluation, A credit card issuer can reject card applicants even if it has invited them with "pre-approved" junk mails.

Prime Rate

Most credit cards use the "prime rate" as a base rate (e.g., "prime + 12%"). The prime rate used is taken from the Money Rates column of The Wall Street Journal. The prime rate is merely a base rate used to make loans to certain borrowers.

Purchases

Credit card charges you make at merchants. Purchases usually have a lower APR than cash advances.

Secured Credit 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.

Total Finance Charge

The sum of the Monthly Finance Charge and any Cash Advance Transaction Finance Charges (or the Minimum Finance Charge, if applicable).

Unsecured Credit Card

A credit card that is not secured with collateral. A customer can qualify for unsecured credit based on their credit history and financial strength.

Variable Interest Rate

Percentage that a borrower pays for the use of money, and which moves up or down periodically based on changes in other interest rates.