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15 Important Credit Card Terms to Consider Before Applying for a Credit Card
If you don’t understand the language, credit card offers and statements can lead you into deep debt—or at least furious frustration. Below is the meaning of frequently used credit card terms in small print.
1. Average daily balance — This is the method most credit cards use to calculate your payment due date. The average daily balance is determined by adding each day’s balance and dividing the total by the number of days in the billing cycle. The average daily balance is then multiplied by the card’s monthly periodic interest rate, which is obtained by dividing the annual interest rate by 12. A card with an 18 percent annual rate would have a monthly recurring interest rate of 1.5 percent. If this card had an average daily balance of $500, the monthly finance charge would be $7.50.
2. APR (Annual Rate) — The annual interest rate, which includes the fees and expenses paid to acquire the loan. Lenders are required by law to disclose the APR. Interest is calculated in a standard way, based on the average compound interest rate over the loan period, so that borrowers can compare loans.
3. Balance transfer — Moving unpaid credit card debt from one issuer to another. Card issuers sometimes offer teaser rates to encourage balance transfers and balance transfer fees to discourage them from leaving.
4. Cash advance fee — Bank fee for using credit cards to obtain cash. This fee can be expressed as a flat transaction fee or as a percentage of the cash advance amount. For example, the fee might be expressed as “2%/$10”. This means that the cash advance fee is 2 percent of the cash advance amount or $10, whichever is greater.
Banks may limit the amount you can take to a specific dollar amount. Depending on the bank that issued the card, the cash advance fee may be deducted directly from the cash advance when the funds are received or credited to your account from the day the advance is received. The cost of a cash advance is also higher, as there is generally no grace period. Interest accrues from the moment the money is withdrawn.
5. Cardholder agreement — A written statement containing the terms of the credit card account. A cardholder agreement is required by Federal Reserve regulations. It must include the annual percentage rate, the monthly minimum payment formula, the annual fee, if applicable, and the cardholder’s rights in billing disputes. The card issuer may make changes to the cardholder agreement at any time with written notice. The rules for making changes vary from state to state, but the rules of the issuing bank, not the cardholder’s home state, apply.
6. Financial charge — The fee for using a credit card, which consists of interest costs and other fees.
7. The floor — The minimum rate on a variable rate loan or line of credit after any initial introductory rate period. For example, on a credit card whose index is the prime rate, the interest rate on that line may not drop below the stated minimum interest rate, no matter how low it drops.
8. Free period — Also known as a grace period, a free period allows you to avoid finance charges by paying off your balance in full before the due date. Knowing if the card offers a free period is especially important if you plan to pay your account in full each month. Without a free period, the card issuer may impose a finance charge from the date the card is used or from the date each transaction is credited to your account. If your card includes a free period, the issuer must mail your bill at least 14 days before the payment date to give you enough time to pay.
9. Minimum payment — The minimum amount the cardholder can pay to keep the account in default. Some card issuers set a high minimum if they are unsure of the cardholder’s ability to pay. Most card issuers require at least two percent of the outstanding balance.
10. Fee for exceeding the limit — Fee charged for exceeding the credit limit on the card.
11. Periodic rate — Described interest rate for a specific period of time. The monthly periodic interest rate is, for example, the cost of credit per month; the daily periodic interest rate is the credit cost per day.
12. Pre-approved — A “pre-approved” credit card offer means only that the potential customer has passed an initial credit check. A credit card company can repel invited customers with “pre-approved” spam if it doesn’t like the applicant’s credit rating.
13. Secure card — A credit card that the cardholder secures with a savings deposit to ensure payment of the outstanding balance if the cardholder fails to make payments. It is used by people who are not familiar with credit or who are trying to rebuild their bad credit ratings.
14. Teaser rate — Often called an introductory rate, this is a below-market interest rate offered to entice customers to switch credit cards or lenders.
15. Variable interest rate — The percentage that a borrower pays for the use of money, which periodically moves up or down in response to changes in other interest rates.
I hope these terms will help you a little in choosing your next credit card.
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