Credit Card Terminology

Are you a careful reader of your credit card statement or do you just look at the amount due and hope you have it? I quick look at credit card terminology may get you more interested in reading the statement and improving your credit experience. Annual fee A flat yearly charge similar to a membership fee. If you establish and maintain good credit it is easy to find credit cards that do not charge an annual fee. Annual percentage rate (APR) A measure of the cost of credit expressed as a yearly rate. Many credit card plans charge different APRs for credit used in different ways—for example, one APR for purchases, another for cash advances, and still another for balance transfers. Some plans may increase the APR if a payment is late. By law and by their agreement with you, they have the right to do that. Cash-advance fee A fee charged if you obtain a cash advance. This fee is in addition to the interest rate charged on the amount of the advance. Cash advances are usually a very poor way to raise a bit of cash and should only be used as a last resort. Finance charge The dollar amount you pay to use credit based upon your interest rate. Besides interest costs, the finance charge may include other charges such as cash-advance fees. Grace period A period of time, often about 25 days, during which you can pay your credit card bill without incurring a finance charge. Under nearly all credit card plans, the grace period applies only if you pay your balance in full each month. It does not apply if you carry a balance forward. Also, the grace period usually does not apply to cash advances. You’ll feel better if you pay early and maintain good credit. Interest rate A measure of the cost of credit, expressed as a percent. Most credit card users aren’t aware that there are a variety of ways that credit card companies charge you for the balance you carry forward. For variable-rate credit card plans, the interest rate is explicitly tied to another interest rate, such as the prime rate or the Treasury bill rate. If the other rate changes, the rate on your card will, too. The interest rate on fixed-rate credit card plans, though not explicitly tied to changes in other interest rates, can also change over time. The card issuer must notify you before the “fixed” interest rate is changed. A tiered interest rate means that different rates apply to different levels of the outstanding balance (for example, 16% on balances of $1–$500; 17% on balances over $500). Late-payment charge When your payment is late most cards charge you a fee. If your payment arrives after the grace period, you may be charged both a finance charge (the interest on your outstanding balance) and a late-payment charge. Some card issuers may also impose a penalty rate if you have more than one late payment within several months. That is, your interest rate goes up if you are continually late. It’s expensive if you don’t pay on time. For example, if you make 2 late payments within 6 months, a card issuer may have a policy of raising the interest rate an entire five percent. It’s all in the fine print of the agreement you get when your card is delivered to you. Over-the-limit fee A fee imposed when your charges exceed the credit limit set on your card. Periodic rate The rate you are charged each billing period. For most credit card plans, the periodic rate is a monthly rate, calculated by dividing the APR by 12. For example, a credit card with an 18% APR has a monthly periodic rate of 1.5%.