Article | 5:58 min read

Credit Card Basics and Terms

Credit and Debt

Often you’ll hear terms like “APR,” “balance transfer,” “interest,” and “credit score,” but what does it mean? Here we’ve broken down the common credit card terms you need to know, and how it impacts your financial life.

● Annual fee – An annual fee is a yearly charge by a credit card company or financial institution for using their credit card. A card might have great perks that are helpful for you, so you’d be willing to pay the yearly fee.

● APR or Annual Percentage Rate – The annual percentage rate is the percentage a credit card company will charge you on any remaining balance at the end of your statement cycle, otherwise known as the rate used to calculate interest. 

► For example, if you have a credit card with an APR of 10%, and a balance of $500 on your credit card. At the end of your statement cycle, or when it’s time to pay the bill, you only pay $300. The credit card company will charge you interest for the remaining $200. 

► $200 x 10% = $20

Other factors, including types of transactions, may apply too. For example, cash advances accumulate interest immediately after the transaction date is posted. 

● Available Credit – The available credit on a credit card, means that’s how much money (or credit) is remaining, until you reach the credit limit. Your available credit may have different amounts available for purchases versus cash advances. You can figure out your available credit by subtracting any purchases and interest, from the total credit limit on the card.

► For example, if you have a credit card with a $1,000 credit limit – you’re only able to spend the amount of the credit limit. If you spent $300, then you’d have $700 in available credit. 

● Balance – Your balance is the amount you owe the credit card company. Your balance can change depending on when and how you use your card – anytime you make a purchase, or complete a payment, your balance changes. 

● Balance Transfer – A balance transfer is typically when you move a remaining credit card balance to a new card. This can help someone who has a higher credit card balance, move to a credit card with a lower APR, in order to pay less interest on their balance. Eventually, the goal is to pay off the balance completely. 

● Cardholder Agreement – A cardholder agreement is a legal document which includes the terms of your credit card, including the Annual Percentage Rate (APR) of the card, how the credit card company calculates your minimum payments, what any fees are, and more.

● Cash Advance – A cash advance is when a credit card company allows you to borrow money against your line of credit on your card, like “buying” cash with your credit card. You can typically do this at an ATM, in-person at a branch, or if your card comes with convenience checks. 

There are often fees associated with a cash advance – cash advance APR, cash advance fee, ATM or bank fee, and interest. It’s important to read your Cardholder Agreement to fully understand what type of fees you could face. 

● Credit limit – This is the maximum amount of money you can spend on a credit card, before facing possible fees. If you meet your limit threshold, the credit card company may decline you for making purchases until you reduce your overall card balance. Credit card companies determine your credit limit based on a variety of factors such as your income and information from your credit report. 

● Credit report – A credit report is a statement with information about your credit activity and your current credit situation, such as payments on loans, and the status of your credit accounts.

● Credit Score – This is a credit-scoring model used to identify credit risk. This algorithm breaks down a person’s ability to repay a loan or balance on a credit card. There are many different models used across different lenders, which can sometimes result in a few points difference of your credit score. A few factors measured are: 

► Payment History 
► Any amounts you owe
► Length of credit history
► Any new credit
► What mix of credit you have

Generally, a higher credit score means you have more potential to repay a debt or loan, which means you’re more likely to get a lower APR on future loans or credit cards.

● EMV Chip – An EMV chip is generally embedded in a plastic card. This chip has expanded memory and updating capabilities. Basically, it helps provide a method to more securely process transactions. 

● Fixed APR vs Variable APR – A fixed APR will not change; Variable APR rate is tied to an index, such as Prime Rate, and it adjusts periodically based on how the index adjusts. 

► For example, let’s say you have a credit card with an APR of 8% + Prime, and if the Prime Rate is 3%, then your APR for that credit card would be 11%. If the Prime Rate goes up or down, so will your APR for the card.

► On the flip side, if you have a card with a fixed APR of 8%, it will remain at 8% until the credit card company or financial institution changes the rate.

● Foreign transaction fee – This is a fee credit card companies can charge you for international transactions. It can either be a set fee per transaction, or a percentage of the transaction. 

● Interest – This is the amount a credit card company can charge you on any remaining balance at your statement cycle. Interest is based on types of transactions and the APR for the particular transaction type. 

● Introductory APR – An introductory APR is the special rate applicable for a period after opening a credit card, where the interest rate will be lower than the regular APR of the card. After the intro period, the APR will increase to the standard rate. 

► For example, if you open a credit card with an intro APR of 6% for 12 months. After the 12 months are finished, the APR will increase to the regular rate with the credit card. 

● Late-Payment Fee – This is a fee credit card companies can charge if you do not meet the minimum payment by your stated due date late, or miss a credit card payment. 

● Minimum Payment – At the end of each statement cycle, there is a minimum payment listed on your bill. This is the smallest payment amount a lender will accept without listing you as delinquent. This amount is calculated based on your total balance; however, some companies may add an additional amount if your account is over-limit. 

● Terms and Conditions – These are rules and guidelines of the agreement between a credit card issuer and the cardholder. This document outlines any fees, the APR, and interest of the credit card.

● Tokenization – A token is assigned to you when you add your card to a digital wallet . That token is only for that particular device – if you want to add your card to a digital wallet on another device, like a tablet or iPad, you’ll receive a new token. It’s a safer way to store card information, and provides more security when completing online transactions. 

 

Sources: 
What is a credit report?, Consumer Financial Protection Bureau

The information provided in these articles is intended for informational purposes only. It is not to be construed as the opinion of Central Bancompany, Inc., and/or its affiliates and does not imply endorsement or support of any of the mentioned information, products, services, or providers. All information presented is without any representation, guaranty, or warranty regarding the accuracy, relevance, or completeness of the information.