Credit card jargon glossary: don’t get swindled because you don’t understand the lingo
February 14, 2020
Plastic probably never felt so good as when you got your first credit card. Though it’s a powerful tool, Uncle Ben was right when he said, “With great power comes great responsibility.” College students today are struggling to keep up with an average credit card debt of $3,000. By the time they’re 25, that number will be around $10,400.
Unfortunately, many new cardholders don’t realize there’s more to a credit card than a credit limit. This guide is here to set the record straight on important credit card terms, so you don’t ever get swindled into debt. Read the glossary below to get up-to-speed on the most critical credit card jargon.
The annual fee is what credit card issuers charge you for membership. Some personal and business credit cards come with no annual fees, but others can have significant fees, like the Chase Sapphire Reserve® card, which charges a steep $450 annual fee. If you never use your credit card rewards or don’t earn enough of them to cover the cost of your annual fee, consider canceling the card for card companies that don’t charge you.
Annual percentage rate
If you were shocked at the amount of taxes taken out of your first paycheck, wait until you see how much gets added on to your credit card bill because of interest. Interest is determined by your annual percentage rate (APR). The higher the APR, the more you’ll pay in interest on your statement’s balance. That’s why it pays to search for low-interest credit cards like the VentureOne® Rewards credit card from Capital One.
APRs can either be fixed or variable. Fixed rates mean your APR never changes, while variable APRs can increase or decrease over time. Most credit cards have variable rates, but don’t worry about card issuers changing your interest rate on a whim. The Credit CARD Act of 2009 put rules in place to protect cardholders from unreasonable or drastic changes.
You can find your current APR on your credit card agreement and monthly statement. When shopping around online, you’ll see a card’s regular APR listed next to the intro APR. It’s presented as a range, such as 16.67% to 25.49%. Those with the best credit scores are given rates on the lower end of the spectrum. If you wish your current credit card had lower rates, speak to customer service about it. They might consider your request if you always pay on time and are a responsible card user.
Credit card balance transfer
A credit card balance transfer means you move what you owe from one card to another. Balance transfer APRs can be different than purchase APRs. Also, note that your intro APR may or may not apply to balance transfers. To know for sure, read through the credit card terms when looking for a new credit card, or visit your online account for your existing cards.
Many credit cards also charge a balance transfer fee of 3% to 5% of the transfer amount, though some cards waive this fee on your first balance transfer made within the intro APR period.
Cash advances are short-term loans withdrawn from an ATM or bank. Using the convenience checks you might have received upon opening your account also counts as a cash advance. Your card terms specify up to what portion of your credit limit can be taken out as cash.
Before you reach for a cash advance to meet rent payments or to cover other bills, it’s crucial to know cash advances have some of the highest APRs. And they’re likely to be significantly higher than your purchase APR.
Cash advances also have no grace period, so be prepared to start paying interest before you even pull the bill out of the ATM. You’ll also need to factor in a cash advance fee for every transaction, typically the greater of $10 or 5%. That said, cash advances can be very expensive.
Better alternatives may be to borrow from friends and family, ask for a salary advance, or get a loan from a credit union.
Credit utilization ratio
As a college student or millennial, you’re probably looking to build your credit score; that number that tells lenders if you’re a high-risk borrower or not. The better your credit score, the higher the likelihood card issuers and banks will approve your credit card or loan application.
One of the determining factors of your credit score is your credit utilization ratio. That’s how much of your card’s credit limit you’re using. For the best scores, only borrow up to 30% of your credit limit. On a credit card with a $3,000 revolving balance, this means $900 or less.
If you pay your statement the day it’s due, you’re in the clear, right? Not exactly. While it may not be explicitly written on your statements, there’s usually a payment cut-off time, typically 5 p.m. And while you might think you made the deadline by getting your payment in at 4:59 p.m., some credit cards take a day or two to process and post payments. The result? Your payment is considered late. You may need to pay a late fee and penalty APR, plus your credit score could nose dive by as much as 100 points.
Sometimes cards offer to post payments the same day if you pay an expedited fee, but you can avoid the stress and hassle by paying your bill at least three days before your due date, or more if you’re paying your statement from your bank’s bill-pay portal instead.
Foreign transaction fee
Studying abroad? Understandably, you probably don’t want to walk around with a wad of cash. So you figure you can take any credit card on the trip, right? Not if you want to avoid paying extra for each and every purchase. Many credit card companies charge a 1% to 3% fee for every transaction made outside the U.S.
Typically, travel credit cards — such as the Gold Delta SkyMiles® Credit Card, waive foreign transaction fees. But, you’ll want to talk to customer service to verify your card’s terms. And while you’re on the phone, be sure to let them know of your travels, so they don’t block your card because of suspicious activity.
Your grace period is the time between the end of a billing cycle and your statement due date. It’s usually around 21 days, and the period you have to pay your balance in full to avoid paying interest. Miss a due date or make only a partial payment, and you’ll get charged interest on what you still owe from your statement balance.
Beware that some credit card companies don’t have a grace period, so as soon as you make a purchase, interest begins accruing. Some cards will also hit you with a penalty APR on your balance if you make a late payment. Penalty APRs can be up to an eye-watering 29.99%.
Another way to avoid paying interest on purchases is by taking advantage of an intro APR when you first get your credit card. As a perk, many credit cards offer 0% APR for as long as 15 months or more after first opening your account. In effect, they’re letting you borrow money for free for purchases, and sometimes balance transfers.
But before you get swipe-happy, be mindful to keep credit utilization ratios in check and to make sure you can meet minimum payments. If your payment is late by even one day, the card issuer can cancel your intro APR. You’ll be stuck paying a higher APR on your remaining balance.
This one term is probably single-handedly responsible for why the majority of new credit cardholders go into debt. Credit card statements often list the minimum payment due in big bold letters, subtly encouraging cardholders to pay that amount instead of the “statement balance.”
But remember, you pay interest every month your balance carries over. If you give only the minimum, it’ll take years for you to pay off your credit card, and you’ll pay a lot more in the end.
For example, at the start of college, let’s say you charge a new laptop and iPhone for a total of $2,300. Student credit cards have an average APR of 19.8% and a minimum payment of 3% of the balance. If you make only minimum payments and charge nothing else to your credit card, you’d spend the next 13 years paying off your balance. You’ll also pay a total of $2,431 in interest along the way.
To avoid credit card debt, make it your goal to budget your credit card expenses and to pay off your balance in full each month.
Secured credit card
A secured credit card differs from a traditional credit card in that you must leave a cash deposit with the card issuer. This is a form of collateral in case the cardholder can’t make payments. Aside from this inconvenience, secured credit cards, like a Discover it® Secured or a Citi® Secured Mastercard®, are options for bad credit or for those with little to no credit, because they help build up credit profiles. Discover it® Secured is also one of the select few secured credit cards that offers rewards.
It’s tempting to overspend on a rewards credit card to take advantage of welcome offers or rewards. Welcome offers give you bonus points for spending a certain amount, usually in the first three months of opening your account. You can then redeem those bonus points on travel, gift cards and whatever else your credit card specifies.
But keep in mind that while reward and cash-back credit cards like the Wells Fargo Propel American Express® Card and the Chase Freedom Unlimited® credit card have great welcome offers, they are a one-time deal. That’s important because regular credit card rewards have a value of 1% to 5% of purchases, but interest rates can be 23% or higher. As a result, carrying a balance from month-to-month can quickly negate the value of your rewards.
Credit cards are an asset
Credit card use is on the rise because they are a convenient and often rewarding way to pay for goods and services. Today’s credit cards even let you make money as you spend with great rewards and bonuses. But to be a savvy card shopper and ensure credit cards work in your favor, it’s essential to know common credit card terms, to read the fine print and to thoroughly understand your credit card agreement.