Credit Card Terminology

Credit Cards
Feb 162011

Understanding Credit Card Terminology

• Annual Percentage Rate (APR) – A credit card’s interest rate, expressed as a yearly rate.

• Arbitration – A form of dispute resolution that is often binding with no right to appeal that may prevent you from suing the company or joining class action lawsuits. Many credit card companies require that cardholders settle disputes using an alternative to the courts called arbitration in which an independent third party hears both sides of the case and reaches a decision on how to settle the issue. It is often binding, with no right of appeal – this is then referred to as binding mandatory arbitration. You should look closely for arbitration provisions and fully understand that you are giving up your right to go to court by accepting the terms of most arbitration provisions. Also, most arbitration clauses require that cardholders who bring disputes pay their own arbitration fees, however, some card companies may pay for cardholders who cannot afford to pay the upfront costs.

• Balance Transfers – The ability to transfer the balance from one credit card to another. If applicable, interest on balance transfers begins to accrue immediately.

• Cardholder Agreement – A legal contract between you and the card issuer that spells out terms and conditions relating to your credit card account. If you misplace the agreement, log on to your issuer’s website or call customer service to get a copy. By accepting and using the card, you agree to comply with the terms of the agreement. Credit card agreements are standardized contracts and as a card applicant, you may accept or reject the contract, but you cannot modify its terms.

• Cash Advance APR – The interest rate you pay when you use your card to get cash. Most cards charge a higher interest rate for cash advances than for purchases.

• Convenience Checks – Checks linked to your credit card account. They can be used to transfer a balance from another card or to make purchases or payments.

• Credit Score – This is a number that reflects your creditworthiness and it is based on the information in your credit report. Scores generally range from 300 to 850 and usually, the higher your score, the lower the interest rates you will pay for credit.

• Daily Periodic Rate – Your APR divided by 365 days.

• Default or Penalty Rate – A higher interest rate charged if you pay late, bounce a check or your credit gets worse. Unless you are 60 days late, the new rate cannot be applied to your balance—only on new transactions.

• Fixed Interest Rates – A set or non-variable APR, which can change only when you receive 45 days notice.

• Grace Period – Period in which finance charges do not accrue if you are not carrying a balance.

• Minimum Monthly Payment – The lowest amount that you are required to pay the credit card company each month.

• Payment Due Date – The last day that payment can be accepted without penalty. Each month, your due date will be the same date or day of the month.

• Prime Rate – This is the interest rate that serves as a benchmark for most loans and as such is often used as the ‘index’ to set the interest rate on variable-rate credit. The Prime Rate moves up or down with interest changes by the Federal Reserve Board. When the Federal Reserve raises its target for the short-term federal funds rate, banks almost immediately increase their prime rates. When prime rate goes up, the variable credit card rates follow.

• Revolving Credit – This is the type of credit agreement used by most credit cards. It allows consumers to pay all or part of the outstanding balance in each billing cycle. As credit is paid off, it becomes available again to use for another purchase or cash advance.

• Secured Credit Card – Secured credit cards are an option for people who have no credit history or have a poor one. This is a special credit card that you can obtain only after you have deposited money in a savings account to guarantee that you will pay for your credit card charges. Secured cards look like and are used just like unsecured cards. Often, people who have been denied conventional credit cards can get a secured credit card instead.

• Security Deposit – This is the money you provide to a financial institution to guarantee payment of your secured credit card. Your deposit is frozen while you have the card. If you fail to pay your credit card debts, the funds in the account may be used to cover your obligations.

• Subprime Card – This is a credit card that is marketed to people with poor or damaged credit and is usually offered at a high interest rate.

• Variable Rates – Interest rates that change whenever interest rates go up or down according to a set formula, such as Prime Rate + 3%. If your card has a variable rate, the APR changes when interest rates change. Variable rates change automatically and so your credit card company does not have to notify you each time the rate changes. To check your interest rate, add the current Prime Rate (or other index) to your card’s margin rate to find your APR. Example: The Prime Rate is 5% and your margin in 8.99%: 5% + 8.99% = 13.

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