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A credit card is a piece of plastic that could bring a blessing or a curse to the cardholder. It’s a complex financial product that can help improve a person’s financial situation if you use them conscientiously or wipe you out financially if you use it carelessly.
Here are the most popular credit card terms you have to know:
Credit card issuers charge this fee every year to grant you the right to use their cards. They would often charge this to you on a specific date by adding the charge to your balance. However, there are card companies that spread the fee over a year and charge you for a monthly fee.
So, you must check whether or not there is a fee that comes with using the card and when or how often the bank will charge it. Remember that many issuers will waive the first year’s fee when you sign up. Take note of that when you plan to cash in on the sign-up bonuses and canceling the card before one full year lapses.
Most credit card companies will allow you to carry balances month-to-month but prepare to pay interest charges on these balances. The way to skip the interest charge on your purchases is to pay your balance in full every billing cycle or simply, maintain a zero balance on your card.
If you pay less than the full balance, the card company will compute and charge interest on the balance and add it to your account. This interest is the Annual Percentage Rate (normally a yearly rate), which is what card issuers collect from you for using their money. Some cards have a higher APR than other cards, so you obviously have to make a higher payment to them.
As an authorized user, you have the authority to use another person’s credit card to make purchases without being primarily liable to pay the bill.
Authorized users usually get their own cards which the bank links to the primary cardholder’s account. Another benefit of being an authorized user is that the card company reports the account’s payment history and activities to the credit bureau on your behalf.
The process of moving some or all of your balance from an old card to a new one. Consumers do this to take advantage of a lower interest rate or an introductory zero percent APR promotion on a new card.
They would have to pay a balance transfer fee to do this, but some balance transfer credit cards offer it for free for a limited time.
A balance transfer fee is a fee charged by a credit card issuer for transferring a balance from one credit card to another.
A credit bureau is a reporting agency that serves as a clearinghouse for data on the credit ratings of individuals.
Card companies, banks, and borrowers regard them as a “consumer reporting agency.” In the United States, there are three most popular and largest credit bureaus namely Equifax, TransUnion, and Experian.
CVV stands for card verification value. It’s the credit card security code that helps in verifying the legitimacy of a card. This code can be a three-digit or four-digit number and you can find this on the back of the card or in some cards, on the front (depending on the issuer).
A cash loan that you take from your credit card account which you get through an ATM, bank withdrawal, or a check from the card company. You normally can’t take a cash advance for your full credit limit – there’s a cash advance limit that’s much lower.
Card issuers often charge a higher APR on cash advances than for regular purchases and accrue the interest at once without any grace period. Plus, you need to pay a fee for a cash advance transaction.
This is probably the most important 3-digit numbers when it comes to your financial situation. This score provides a quick reference of how you have managed your credit in the past and how low (or high) of a risk you are to creditors. So, a higher score is always better. Your credit score comes from collective information in your personal credit report.
Your credit report is a summary of all your loan accounts and includes all your credit cards and your payment performance. Credit issuers report your credit line, credit balance, and payment history (whether or not you pay on time) to the credit bureaus.
The credit bureaus convert this information into numbers and use them in an equation to come out with your credit score.
If you have a good credit score, you have a bigger chance of getting approved for loans and other financial products, such as insurance, at good rates. If you have a low credit score, it will be hard to get loan approval and if a lender would accommodate you, it’s probably in exchange for a higher interest rate to compensate for the risk they will take. In some cases, like a home loan, for example, the lender might outright reject your loan application.
This is the maximum amount that the credit card issuer is willing to lend to you through your card. On a credit card, how much you have available to use will depend on your available credit limit.
For example, if you have a $3,000 credit limit, that is the total amount that you can have outstanding at any given time. If you charge $2,500 to your card, you will only have $500 left on it. You need to make payment to free up more credit limits on your card. So, if you pay $2,500 before your due date, your available credit goes back up to $3,000.
The credit utilization rate is the amount of credit used compared to the total credit available, expressed as a percentage.
Collateral is a property or asset that is pledged as security for a secured credit card, with the issuer having the right to seize it if the borrower defaults.
A contactless card is a type of credit card that allows for transactions to be made without inserting the card into a card reader.
A co-branded card is a credit card that is issued in partnership with another company, such as an airline or hotel.
What differentiates a debit card from a credit card is that there’s no borrowing of money involved in it. When you have a debit card, it means you should have money in a bank account that the card represents.
As you use your debit card to make purchases, the bank immediately deducts the amount that you use from your bank account. They will not extend any “credit” to you such that when your funds run out, you can’t use your card anymore until you deposit more money.
If you notice an error in your bills, you should write to your credit issuer at the address that appears on your statement within 60 days of receiving the statement.
The credit card company should acknowledge your letter with 30 days and either correct the mistake or explain why they think it is accurate within two Billing Cycles, but no later than 90 days after the receipt of your letter.
Debt consolidation is a process of combining multiple credit card debts into a single loan to simplify debt repayment and potentially lower the interest rate.
The due date is the date by which a cardholder must make a minimum payment on their credit card balance.
The failure to make minimum payments on a credit card account by the due date, potentially leading to late fees and harm to credit score.
This is a computer chip that card manufacturers have embedded on the card itself. It functions to provide a unique transaction code each time you use the card. Unlike the defunct magnetic strip on the back of the card, this transaction code is for single use only, which is very important in preventing credit card fraud.
EMV is not a high-tech acronym but simply stands for Europay, Mastercard and Visa, the three card companies that agreed to adopt the security standards of the EMV chip.
FICO (Fair Isaac Corporation) is a leading credit scoring model used by lenders to determine a borrower's creditworthiness.
Fraud protection is a set of security measures put in place by a credit card issuer to protect against fraudulent transactions.
A grace period is a specified time during which a borrower may make a payment without incurring late fees or interest charges.
A hard inquiry happens when a financial institution such as a credit card issuer or a loan company checks your credit report to decide whether or not you can borrow money from them.
This will happen when you apply for a loan, mortgage or credit card. Any hard inquiry on your account will lower your credit score and it will stay on your report for up to two years. To know more about credit inquiries, check out our resource page.
Some card issuers will offer a grace period. This is the time during which they won’t charge you interest and fees on your balance.
If you carry debt, balance transfer credit cards with 0% intro APR can be very useful for you.
Installment credit is a type of credit where the borrower repays a fixed amount of debt in regular payments over a set period of time.
A credit card account shared by two or more individuals where both parties are equally responsible for paying the debt and can use the card.
If you don’t pay at least the minimum amount due on your card by the due date, the card company will consider your payment as a late payment.
Many issuers will collect a fee for this, but some will waive the first one or even all late fees. Being late in paying for more than 30 days will most likely adversely impact your credit score.
A program offered by a credit card company to reward cardholders for using the card by earning points, miles, or cash back on purchases.
The least amount that you can pay each month on your credit card bill without incurring a late payment fee.
Card issuers may not have the same formula to calculate the minimum payment but it’s usually one percent of your balance plus any interest or fees that are due. If your balance is low, they may charge a minimum amount that is higher than one percent.
A business that accepts credit cards as a form of payment for goods or services.
A prepaid card is a type of payment card where the user loads funds onto the card in advance, allowing them to spend the funds without a credit line.
The process of evaluating an applicant's credit history and financial situation to determine their eligibility for a credit card.
A personal identification number used for secure credit card transactions, typically entered at an ATM or point of sale.
This has become a staple feature of credit cards where they give cardholders certain rewards for using the card. Here are the most common ones:
- Rewards to a loyalty program. An example of this is Miles or travel rewards card that grants you airline miles for a certain amount that you spend. You can use the miles you accumulate to get free airline tickets.
- Rewards to a transferable points program. Card companies give point rewards for every dollar you spend such as one rewards point per dollar. You can redeem your total points for merchandise items from the reward program’s online shopping mall. Take note that card companies will have their own conversion values so it does not automatically mean that 1 point is equal to a $1-purchasing value.
- Cash Back Rewards. This program gives you back a percentage of every dollar you spend in the form of cash. The card issuer may give it through a statement credit (which lessens your balance), direct deposit to your account, or a check which they will send to your address. Some cash back programs also make gift cards available as rewards to cardholders.
Revolving credit is a type of credit that allows the borrower to repeatedly use and repay the loan balance, as long as the account remains in good standing.
This is a type of credit card that you can get only if you make a security deposit as collateral. You usually put it in cash and the card company will use it to pay for the purchases you made through your card in case you default on your monthly payment. Card companies offer secured credit cards for people who are new to credit or have low credit scores.
In most cases, the bank will return the deposit when the cardholder closes his account or upgrades to an unsecured card after showing responsible use and on-time payments.
Some credit card issuers will give a sign-up bonus to their new cardholders usually when they spend a certain amount within a given period.
They give this bonus as a one-time benefit. An example would be to give you a $500-bonus if you spend $3,000 in three months using your new card.
The offers are not the same. Some cash-back credit cards will give $100 to $200, while some premiere travel cards can give a bonus of $500 or more.
Soft inquiries happen when a person or company looks into your credit report for various reasons. It could be for a background check when the card company “pre-approves” you for a card, and when you personally check your credit scores.
These inquiries are merely to get information and they do not use the information to make any credit decision. You can check your credit score as often as you want to, and it will not affect your credit score.
A Schumer Box is that easy-to-read table or “box” that contains the rates, fees, terms and conditions of a credit card agreement in compliance with the federal Truth in Lending Act (TILA). It requires a uniform standard format for all credit card issuers to disclose selected aspects of a credit card agreement.
This will help consumers to easily understand and compare rates and fees that come with a credit card. As a consumer, you should read the Schumer box carefully to understand the basics of the credit card.
The statement balance is the total amount owed on a credit card as of the most recent statement date.
This portion provides a detailed explanation of how the credit card works. You will usually find this in your cardmember agreement but typically in a fine print. The agreement will outline the different benefits, how the company will charge interest, and what you should expect in different scenarios.
It is important that you’ve read and understood the Terms and Conditions of your card before you use it. Once you make your first purchase, you are also giving your conformity to everything they have written in the agreement.
The exchange of goods or services between a cardholder and a merchant, in which the cardholder pays with their credit card
VantageScore is a credit scoring model used to calculate a consumer's creditworthiness, developed by the three major credit burea