Before you even consider applying for a credit card, you should be familiar with some popular credit card terms. This, along with some spending basics, will help you master the credit card and help you start benefiting from having one. Here are some of the most common credit card terms that everyone needs to know, including their definitions.
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Simply put, a credit card’s annual fee is a yearly charge that is charged to the owner of the card to even use the credit card and take advantage of its benefits. Credit card annual fees can ragne from around $25 upwards to $500 a year depending on the card. Most consumers will try to find a credit card with the benefits they want, but without the steep annual fee.
Annual Percentage Rate (APR)
The annual percentage rate, or APR, is the annual cost of borrowing your money on your credit card. A credit card can have several APR’s, including the APR on purchases, cash advances, balance transfers, and penalties/defaults. The APR on purchases is the interest rate charged after the grace period ends.
A credit limit is simply the most you can spend on your credit card without incurring a penalty. If you have a short credit history and few credit accounts, your credit limit on a credit card will most likely be low. For people with a longer credit history and no blemishes on it, your credit limit will be much higher. Credit card companies and issuers may even raise your credit limit over time, as long as you make your payments on time and use your credit responsibly. If you do go over-lmit on your credit card, you may have to pay a fee. The penalty APR may even be triggered on your card. You can opt-in and opt-out of over-limit charges and associated fees.
Your credit score is an indicator of how likely it is that you will pay back the money that has been loaned to you. Everything about credit cards affects your credit score, including the number of cards you have (if any), the entirety of your payment history, and other factors associated with your debt history. If you use credit cards, you must use them carefully since your credit score impacts other areas of your life such as getting a mortgage or a car loan.
The due date on your credit card is the date where you have to make your minimum payment to the credit card company that issued you that card. It is usually due at 5 p.m. on the due date, but some credit card companies may have a deadline that is a little later in the evening. If you don’t make your payment by the due date, you will incur a late fee, an increased APR, and you may be reported to the credit bureaus.
Grace periods are time period on credit purchases in which interest is not assessed after a purchase is made. Depending on the credit card, there may only be a grace period on purchases if you do not carry a balance on your credit card. According to the Credit CARD Act of 2009, the grace period must be at least 21 days.
Late Payment Fee
If you do not pay at least your minimum payment on your credit card by the due date, you are assessed a late payment fee. The fee generally will be between $15 and $37 and is based on the size of your balance. For small balances, it is a large percentage of your balance. If you are late making several payments or if one payment is more than 60 days late, your APR will flip over to the penalty rate which is between 27%–30%.
Your credit card minimum payment is the lowest amount you can pay every month while remaining in good standing with your card company. It is usually between 1%–3% of your outstanding credit card balance. If you have a relatively low balance on your credit card, you may be assessed a payment that is a percentage of your outstanding balance or $25 whichever is higher.
Credit card debt is the most expensive debt you have, and if all you pay each month is the minimum payment, it will take a long time to pay off your bill.
A revolving balance on a credit card is the amount of your credit limit that you have used and not repaid. It is the portion of your credit limit on which you pay interest (APR) every day because you did not pay it off at the end of the previous month. If you pay your credit card balance in full every month, you will not have a revolving balance.
Security Code (CVV)
The security code, also known as the card verification value (CVV), on your credit or debit card is used primarily for “card-not-present” transactions like online transactions. It is simply another level of security to ensure you are the owner of the credit card. It also protects you from credit card skimmers like the kind that are used at gasoline pumps. Since the CVV code is not included on the magnetic strip on the card, a skimmer cannot pick it up. On most credit cards, it is printed to the right of the magnetic strip. On American Express cards, it is on the front of the card.
Credit cards can be a little bit intimidating, especially if it is your first time, but as long as you know all the important credit card terms, then you’ll be an expert when you start looking for one! For more posts like this, check out our list of bank guides and credit card bonuses!