Credit Cards 101: Understanding Credit Card Terminology

Credit card terms can be confusing. We compiled some common terms and their meanings, in what we call Credit Cards 101, to help you make informed decisions when taking on credit card debt. Credit card issuers also count on your understanding of credit cards to handle and repay debt responsibly. So, carefully read the credit card terminology below:

Common Credit Card Terms

Annual Fee

Annual fee is the amount an issuer charges you to use their credit card every year. The fee ranges from zero to a few thousand dollars, depending on the scope of your card. The annual fee is charged directly to your card every anniversary of your card holding. Some issuers may waive this fee for the first year, while others offer free use. Compare credit cards before settling for one to find one with fair or no annual fees.

Annual Percentage Rate (APR)

Next up in our Credit Cards 101 is APR. You likely have seen this credit card terminology when applying for regular loans. APR is the annual interest imposed on your outstanding loan balance. Your lender must disclose their APR before issuing the card.

Use the APR to determine the loan cost and compare different credit card offerings. If the issuer provides an annual APR, divide that by 12 to get the monthly rate, and if they offer a monthly interest rate, multiply it by 12 to get the yearly rate, whichever you prefer. However, note that some cards have a variable APR, meaning there are different charges for different types of transactions. So, take your time understanding credit cards to avoid getting blindsided when it’s time to repay.

Introductory APR

Another common term in credit card terminology is “introductory APR”. It is the initial APR charged to your card as a welcome offer. The introductory period lasts 6-21 months, and then regular APR takes over once it's over.

Daily Periodic Rate

Here’s another important term in Credit Cards 101. While some issuers calculate a monthly or yearly interest rate, others do it daily. The daily periodic rate is the amount charged on your purchases at the end of each day. A daily periodic rate can help you keep track of your spending habits, and point you to the right credit cards in your future applications.

Credit balance

Credit card balance is the amount of money you have used on your card, owed to the issuer. It includes the charges made for purchases, cash advances, and balances transferred. If you don't owe anything, the credit balance will appear as zero on your billing statement.

Balance transfer

Here’s another item of credit card terminology in Credit Cards 101 that is important to understanding credit cards. Balance transfer is moving of debt from one account to another. Many card issuers have zero or low-interest balance transfer offers to help you consolidate your debt to one credit card, often at a promotional interest rate. When the promotional period elapses, you get a new higher interest rate. However, other issuers just charge a percentage of the amount you're transferring or for a fixed amount, whichever is higher. It's called a balance transfer fee.

Billing Cycle

A billing cycle is a common term in credit card terminology you’re bound to see frequently on your statements and on your credit card app. It is the period between statements when transactions appear on your account. The time between opening and closing of each billing cycle is approximately one month for credit cards.

Credit Limit

This is an essential term for Credit Cards 101. Your credit limit is the maximum amount you can spend on a credit card. This number depends on factors like your annual gross income, credit payment history, and credit utilization. Building your credit qualifies you for higher credit limits.

Credit Utilization Rate

The credit utilization rate is a percentage of your credit card balance relative to your credit limit. Credit scoring companies use this figure, drawn from across your credit card accounts, to calculate your credit score. Understanding how credit cards work is crucial to keeping your credit utilization rate low because the lower it is, the better.

Grace period

The grace period is time between the end of a billing cycle and the day your payment is due. Most credit issuers offer a grace period, though not mandated by law, usually 21 days from the day your bill is delivered.

Why You Need To Understand Credit Card Terminology

What we’ve shared in our Credit Cards 101 is essential for you to get the most out of your cards, make smart choices to avoid common fees and penalties, and to keep your credit score in good shape. For more information about credit cards and a review of the best offerings, visit LendMeMoney.com. Get the best offer today!