Credit Cards

Credit Card Terms Everyone Should Know


Credit Card Terms Everyone Should Know 19.09.2019Leave a comment
Credit Card Terms Everyone Should Know

Credit card is one of the most popular banking products used by citizens in the US. What is it — just a piece of plastic with Visa, American Express or MasterCard logo? Before you get a credit card yourself, it is essential to know the basic terms so as not to get financial troubles and get the most out of your credit card.

What is the annual fee?

Almost any card has a fee that is charged by the bank for card use. That is an annual payment, which is most often one-time debited for each year of use. But card options with monthly debits may also occur. Usually, this is the case with cards with a relatively high annual fee.

The annual fee in American Express
The annual fee in American Express

You can find credit cards without an annual fee. The size of payments can vary greatly, for example, from $15-20 to $550 a year. The size of this payment depends on the benefits that the card gives.

There is a lot of options for these benefits: cashback, award miles on flights of various airlines (for example, American Airlines card in Citibank), discounts on certain goods and services or certain stores (Amazon, Costco).

If you are interested in additional benefits, then you should carefully look at all the offers on the market and choose what suits you. If you are not interested in such proposals, the minimum annual payment or its absence is your option.

The annual fee is a parameter that you should ask your bank before applying for a credit card.

Otherwise, you will be unpleasantly surprised at where the money from your card disappears and why.

Close your card, if it does not have any additional benefits, and you do not use it. In this way, you will not waste the annual maintenance of your credit card.

Pay attention to advertising messages that your bank will periodically send to you by email or in text. Most often, the bank offers attractive conditions if a person has established himself as a reliable client, and the bank thus expresses its loyalty.

For example, a bank may provide you with a card with a lower percentage, with a more extended grace period, or it may be a card with additional benefits. Moreover, the price for annual service and other conditions will remain the same.

What is the annual percentage rate?

It is often shortened to APR.

It is the total cost of borrowing money from the bank with a credit card on an annualized basis, including the APR and other fees. A credit card can have several fees for purchases, transfers, etc.

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APR, Fee and other American Express card information
APR, Fee and other American Express card information

A credit card may have a grace period during which you use money without paying interest. But in this case, you must replenish the card balance to the original until the end of the grace period. Otherwise, the bank will charge the rate on the entire amount that you have used. If the percent is high, then it will be very unpleasant for you to replenish the card balance. At the same time, a significant part of the money will not be returned to the card balance but will go to pay interest on the use of money.

Usually, the variable APR is from 15% to 30% and depends on your creditworthiness. Intro APR on purchases lasts several months, up to 21. APR is the most basic credit card setting to which you should pay attention.

What is a credit limit?

That is the maximum amount on your card that you can spend. If this is your first time applying for a credit card, then your limit will not be high. Over time, if you show yourself as a trustworthy borrower, make all payments on time — the bank may increase your credit limit.

The longer your credit history, and if you fulfill all your obligations to the bank, the higher your credit limit. Keep in mind that overspending may occur because you did not take into account fees and other payments for using the card. For example, you didn’t spend anything but you had to pay for an annual fee.

What is a credit score?

Banks are interested in the client returning the money on time and in full. In order to avoid problems with late payments or non-repayment of a loan, banks try to secure themselves in advance and understand what clients are trustworthy. For these purposes, financial institutions have developed a number of tools to evaluate a potential client by various parameters and issue a final rating. This rating is recalculated whenever a bank requests it.

A credit score is usually calculated by two methods in the US, each of the methods is based on many data. This data is very important for the bank to make a decision. There are a lot of calculation parameters, but for understanding, you need to know the most important of them.

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The most important criteria is the payment history. The bank looks at your previous loans, how well you paid them. If there were no problems, it is almost half the success.

The term and type of loan is the second most important thing. It shows how well you manage to pay various debts in parallel. For example, a mortgage for 25 years and a car loan for 5 years. If you manage several loans at the same time, your score will be higher.

The percentage of the loan used – that is, how much you use the entire amount provided to you by the bank. If you use less than 30% of the available amount, your credit rating will be better. For example, out of $ 10,000, you use less than $ 3,000.

What is the due date?

Due date is a period when the minimum loan payment should be debited from the bank account. Typically, this charge-off occurs at 5 o’clock in the evening, but there may be variants in different banks.

Minimum Payment Due
Minimum Payment Due
If the payment is not received on time, the bank will charge a penalty for late payment. It’s better not to rely on your memory, but to set up auto payment, so you save yourself from unnecessary worries.

But be sure to check that the auto payment is connected and the amounts occur on their own, without your participation. You will especially need this feature if you have several loans. You will not get confused in the dates and amounts of payments, but will only regularly note that payments go without problems.

What is the grace period?

That is the period during which you can make purchases with your credit card, and you will not need to pay interest in using this money. According to the Credit CARD Act of 2009 in the United States, the minimum grace period for a credit card is 21 days. Most often, the grace period lasts much longer, several months, sometimes even more than a year.

Calculate your strengths, especially if your card has an extended grace period. There is a risk that a long grace period will make you relaxed and carefree, and you will miss the moment when this period ends. If you miss the moment the end of the grace period, interest will accrue to you for the entire time you use a credit card. The longer this period lasted, the huge will be the interest that you have to pay.

It is best to fully repay the credit on the card from time to time, thereby resetting the grace period. Just wait until the funds arrive at the card account and the grace period is updated. After that, you can safely use the card as usual again — you will have enough time in stock to pay off the debt.

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What is a late payment fee?

For any reason, if you do not make a minimum payment by the due date, you will get a late fee. The size of the late fee may depend on the amount of the loan or be a fixed value. In different banks, such a late fee can range from $15 to $35, and it can be very noticeable in comparison with the minimum payment. The amount of the late fee also depends on the period you have overdue your debts. One day of delay and ten days may be the same in size of the late fee.

Late Payment Warning
Late Payment Warning

Other banks may increase the penalty for each day of delay, thereby encouraging you to fulfill your obligations as soon as possible and make a minimum payment. It is also important whether this is your first delay in payment or not. The penalty might be small if you violated the deadlines for the first time. But if you systematically violate the periods, you show yourself as an unreliable client, and the bank will increase your late fee.

Of course, you should be sure that you will make payments on time. But when applying for a credit card, pay attention to the penalty system to understand all possible troubles in case of unforeseen difficulties with debts.

What is the minimum payment?

The minimum payment is the minimum amount that you must pay monthly to your credit card account when using credit funds. If you spend at least this minimum on time, then you can be calm about your credit reputation.

The size of the payment depends on the amount of debt. Depending on the bank and its conditions, it ranges from 1% to 3%. If your mortgage is minimal, then the payment may not be calculated as a percentage, but to have a fixed minimum amount of $25 — depending on which is more significant.

Minimum Payment

Although the timely payment of monthly payments is correct, we recommend you to deposit more. Thus, you will not cause concern as a borrower with limited funds.

What is revolving balance?

That is the amount of your credit on the card that you used but did not repay. For this part of the loan, you pay interest every day if you did not compensate them at the end of the previous month. If you fully repay your debt on a monthly card, then you will not have a revolving balance.

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What is the Security Code (CVV)?

This code is another way to protect your funds from scammers. Usually, this value is needed when paying for goods and services online. This code is most often locates on the back of the card, under the magnetic stripe. It is not possible to read this code through an ATM, nor is this code required when paying through a terminal or when using an ATM.

CVV

Like the pin code of the card, CVV data must not be visible to prying eyes. In most cases, this number is on the back and not on the front side, but there may be exceptions, such as on American Express cards.

What is a balance transfer fee?

That is a fee for transferring funds from the balance of your credit card to another card with a lower interest rate.

Also, be always careful when transferring funds from a credit card. Some types do not allow a credit card transfer at all. You can use them only to pay for goods and services and, possibly, to withdraw cash through an ATM.

If you transfer money from the card of one bank to another bank, you have to pay a fee, even if both cards belong to you.

A partnership agreement may exist between some banks that the fees for transfers between these banks will be not high, or will not exist at all. If you plan such transfers between cards, check the terms of your bank.

What is a cash advance fee?

Whenever you decide to use your credit card to withdraw cash, you will receive a fee for such a transaction. Typically, a cash withdrawal fee is between 3% and 5% of the withdrawn amount. If the amount is minimal, then not a percentage will be charged, but a fixed minimum fee.

If there is a possibility that you will need to withdraw cash several times, it is better to get a large amount of money at a time. This way you will pay one fee and not lose a lot of money.

In sporadic cases, the cash withdrawal fee is absent. Bank will tell you such term as one of the advantages of their card, so you are unlikely to miss such good news. In general, banks encourage users not to withdraw cash, but to pay for goods and services with a card.

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Cash Advance
Cash Advance

If you need to withdraw cash, then you can resort to one evident and legitimate trick. You can pay for your friend’s purchases with your card, and a friend will refund them to you in cash. Thus, you can altogether avoid the fee for withdrawing money, even if you very often need such actions.

In conclusion

It doesn’t matter for what purpose you use a credit card — whether you need extra money or want to enjoy the benefits of a particular card. You should always know all the conditions of the bank on a specific product to avoid trouble. Often, people use credit cards because they have advantages that do not have debit cards. Or debit cards with similar benefits can be much more expensive to maintain than credit cards.

With the proper use of a credit card, you will not lose money on interest and fee for using the card.

For example, under favorable cashback conditions or by saving on the purchase of airline tickets and using the award miles,  you will also be able to win money significantly.

Choose a credit card accurately, carefully study all the conditions, compare them, and you will not be upset by your choice.

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Andrei Shilkov

Blog author. I am well versed in Finance and Digital Marketing. I have two bachelors degrees in Finance. Born in Russia, but later moved to the USA, to western Pennsylvania, the city of Pittsburgh. I have a Certified Public Finance Officer (CPFO) certificate. I also worked at IRS and Microsoft.

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