Credit Card Terms Everyone Should Know
Before you apply for a credit card, it's important that you get to know the basics. Here are some of the most common credit card terms that everyone needs to know, including their definitions.
A credit card’s annual fee is a yearly charge that is charged to the consumer to use the credit card and take advantage of its benefits. Credit card annual fees range from approximately $25–$500 per year depending on the card. Most consumers try to find a credit card with the benefits they want, but without the annual fee.
Annual Percentage Rate (APR)
The APR is the annual cost of borrowing money on your credit card. A credit card has several APR’s, including the APR on purchases, balance transfers, cash advances, and penalties/defaults. The APR on purchases is the interest rate charged after the grace period ends.
The credit limit on a credit card is 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 likely be low. If your credit history is longer and you have no blemishes on it, your credit limit could be quite high. Credit card companies may automatically raise your credit limit as time passes, as long as you make your payments on time and use your credit responsibly. If you go over-limit on your credit card, you may have to pay an over-limit 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 when your minimum payment is due to the credit card company. 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.
The grace period on credit card purchases is the time period 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.
Paying only the minimum payment on your credit cards is hard on your credit score.
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–or card verification value (CVV)–on your credit or debit card is used primarily for “card-not-present” transactions like online transactions. It is just 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.