Do you ever look at your credit card or bank statements and wonder what all the financial lingo means? It’s hard to manage your accounts if you don’t know what the words mean and how they will affect you. To celebrate Financial Literacy Month, we’re bringing you a series on financial terms and their meanings. Today we’re focusing on common credit card terms and how they can affect your financial outlook.
A yearly fee banks charge for the privilege of using of their credit card. To make it sound more exclusive, they may call it a membership or participation fee. Annual fees run the gamut from as little as $15 a year to more than $300. Ideally, you’ll want to use a card that doesn’t impose an annual fee.
Annual Percentage Rate or APR
Lenders are required by law to disclose the APR, which is a yearly interest rate that includes fees and costs paid to acquire the loan. The rate is calculated by taking the periodic rate and multiplying it by the number of billing periods in a year. Your credit card may have separate APRs listed for balance transfers, cash advances or other special offers. If the offers are subject to an expiration date, the relevant balance will usually revert to your default APR.
Average Daily Balance
This is how most credit card issuers calculate your payment due. An average daily balance is determined by adding each day’s balance and dividing that total by the number of days in a billing cycle. The average daily balance is then multiplied by the card’s monthly periodic rate, which is calculated by dividing the annual percentage rate by 12.
This simply means moving an unpaid credit card debt from one card to another. Card issuers may offer extra-low teaser rates to encourage balance transfers. If you’re tempted by such an offer, be sure you know exactly when the introductory rate expires.
This is one of he most important credit card terms to know and understand. Your credit limit is the maximum amount you’re allowed to borrow on a card. It’s also responsible for generating the commonly used phrase “maxed out.”
The charge for using a credit card, including interest costs and other fees. There may be different finance charges for cash advances and balance transfers, so be sure to read the fine print and know what you’re dealing with.
The grace period is the interest-free time a lender allows between the transaction date and the billing date for cardholders who do not carry a balance. The standard grace period is usually between 20 and 30 days. Not all cards offer this courtesy and those who carry balances on their credit cards are not given a grace period.
If you miss your payment date, you’ll be charged a late fee. Late fees can clock in at $30 to $35 per month. You can avoid late fees by arranging auto-pay on your cards to ensure you pay on time every month.
The minimum amount you must pay to keep the account from defaulting. Usually this amount equals 2% of the outstanding balance. To reduce debt more quickly, pay more than the minimum payment each month (and avoid adding any new charges).
If you exceed the credit limit on a card (see #6) you will be charged a fee. Over-limit fees are generally in the neighborhood of $35.
Understanding these essential credit card terms can help you use credit wisely. If you need help managing your credit card debt, free credit counseling can help you get back on track.