Credit cards are a lot more than just a piece of plastic. They’re complex products that can help improve your financial situation if you use them responsibly or cripple you financially if you don’t.
If you want to make the most out of your credit card, it’s essential to know the lingo. Building your credit card vocabulary not only makes you an informed consumer, but also allows you to maximize the value you get out of every credit card you’ll ever own.
30 Credit Card Terms You Need to Know
While this isn’t a comprehensive list, these 30 credit card terms can help you better understand how your credit card works.
1. Annual fee: Some credit cards charge a fee for every year you keep the card. Annual fees are more common with credit cards for bad credit and travel rewards credit cards, but some small business and cash-back rewards credit cards also charge these fees. Depending on the credit card, you may not have to pay an annual fee for the first year you own it.
2. Annual percentage rate: Often shortened to APR, an annual percentage rate is the annualized total cost of borrowing money using your credit card. It includes the card’s interest rate, fees and other charges.
3. Authorized user: As an authorized user, you’re entitled to use another person’s credit card account to make purchases, but you’re not liable for paying the bill. Authorized users typically get a card of their own that’s tied to the primary cardholder’s account. Another benefit of being an authorized user is that the card issuer reports the account’s activity and history to the credit bureaus on your behalf.
“You can use the card and are not required to make the payments,” says Dona Svehla, senior vice president and chief lending officer at GTE Financial, a Florida-based credit union. “If the card is paid timely, then the authorized user will also reap the benefits on their credit report.”
4. Auto rental collision damage waiver: Many credit cards offer this benefit if you pay for a car rental with your card. It doesn’t cover liability insurance, and most cards have some exclusions and limitations. For most cards, the coverage is secondary. This means that if you have an auto insurance policy for your personal vehicle, you’ll need to file a claim with that company first, then your credit card’s coverage will kick in after that.
American Express and the Chase Sapphire Preferred, Chase Sapphire Reserve and United Explorer Card are cards that offer primary coverage, which doesn’t require you to file a claim anywhere else.
5. Available credit: The amount of credit you can use at any given time. It’s calculated by subtracting your current balance plus any pending transactions from your credit limit.
[Read: The Best Airline Credit Cards of 2018.]
6. Average daily balance: This number is determined by adding the balance from each day in a statement period and dividing it by the total number of days in that period. Credit card issuers use your average daily balance to calculate how much interest you owe. You can avoid paying interest entirely if you pay off your balance in full by the due date.
7. Balance transfer: The process of moving some or all of your balance from one credit card to another. People often do this to take advantage of a lower interest rate or an introductory zero percent APR promotion. Most credit cards charge a balance transfer fee, but some balance transfer credit cards offer an introductory $0 fee.
8. Cash advance: A cash loan taken from your credit card account using an ATM, bank withdrawal or check from your card issuer. Your cash advance limit is typically lower than your overall credit limit. Credit card issuers often charge a higher APR on cash advances than regular purchases, and interest begins accruing immediately with no grace period. Also, cash advances typically incur a fee.
“Cash advances can be costly,” says Svehla. “There is often an immediate fee and higher interest rate imposed on the card with a cash advance. The rate can be as high as 30 percent, depending on the card.”
9. Cash back: A rewards program that gives you a percentage of every dollar you spend back in the form of cash. You can typically get this cash back in the form of a statement credit, direct deposit or paper check. Some cash back credit cards also allow you to redeem your rewards for gift cards.
10. Cobranded card: A credit card that is sponsored by a specific partner, such as a retailer, airline or hotel chain. Cobranded cards often offer specialized perks with the partner brand and bonus rewards on purchases you make with that brand.
“A cobranded airline card is going to pay higher rewards when you make purchases with that airline carrier,” says LaToya Irby, a credit expert who covers credit and debit management for TheBalance.com. “Using a cobranded card might also help the cardholder reach loyalty program elite status faster than if they used a regular credit card.”
11. Credit card issuer: A bank, credit union or other financial institution that issues and services credit card accounts. These are not to be confused with payment networks like Visa and Mastercard, which do not issue credit cards. Major credit card issuers include American Express, Discover, Capital One, Chase and Citi.
12. Credit limit: The total amount you can charge to a credit card. You typically get an initial credit limit when you open a credit card account, but you can request an increase later on. The size of your credit limit depends on several factors, including the type of card, your creditworthiness, your income and your overall debt load.
13. Credit utilization rate: Your credit card balance divided by your credit limit. Credit scoring models use this rate when calculating your credit score. A low credit utilization rate is good for your credit score, so keep yours as low as possible for each card and across all your cards.
14. Dispute: If you notice an unauthorized transaction or disagree with a charge on your statement, you can dispute it with your card issuer. The issuer typically has two billing cycles to resolve the dispute. In the meantime, you may receive a temporary credit for the disputed amount.
[Read: The Best Rewards Credit Cards of 2018.]
15. EMV chip: A computerized chip on a credit card that creates a unique transaction code every time you use it. Unlike the magnetic strip on the back of your card, this transaction code is for a one-time use only, which means it can prevent credit card fraud. EMV stands for Europay, Mastercard and Visa, which are the three companies that agreed on the security standards of the EMV chip.
16. Extended warranty: This coverage extends the warranty on certain products you purchase with the card for one year or longer, typically mirroring the manufacturer’s warranty. You may not be required to register the product to take advantage of the benefit, but it’s wise to keep your receipts and original warranty information. Many credit card issuers offer this feature as an added perk.
17. Grace period: The time between the closing of your billing cycle and your due date for that cycle’s final balance. During this time, you can pay off new purchases without accruing any interest charges. If your credit card has a grace period, the CARD Act of 2009 requires that it be at least 21 days.
18. Late payment: If you don’t pay at least the minimum amount due by your due date, your payment is considered late by the credit card issuer. Many issuers charge a late fee, but some will waive the first one or even all late fees. If your payment is more than 30 days late, it can negatively impact your credit score.
19. Minimum payment: The lowest amount you are required to pay each month on your credit card without incurring a late fee. Card issuers may calculate your minimum payment differently, but the standard is 1 percent of your balance plus any interest or fees that are due. If you have a low balance, there may be a minimum amount that’s higher than 1 percent.
20. Payment history: The most important factor in your credit score. To establish a positive payment history, make at least the minimum payment on time every month. You can even take it one step further and pay off the balance in full to avoid interest.
21. Payment network: A credit card company whose primary business is processing credit card transactions. Visa, Mastercard, Discover and American Express are the four main payment networks in the United States. Discover and American Express are also credit card issuers.
22. Price protection: If you purchase an item with your card and the price drops or you find a lower price elsewhere within a set period, this perk provides you with a refund for the difference. The time period, coverage limits and eligibility requirements can vary by credit card issuer.
23. Purchase protection: If you purchase an item with your card and it’s damaged, lost or stolen within a set period, this perk provides reimbursement for the cost of the item. The time period, coverage limits and eligibility requirements can vary by credit card issuer.
24. Return protection: Extends the return life of an item you’ve purchased with your credit card beyond the merchant’s return policy or creates a return policy where the merchant does not have one. If eligible, you can send the item to the credit card company in exchange for a refund. The time period, coverage limits and eligibility requirements can vary by credit card issuer.
25. Schumer Box: A standardized box-shaped disclosure that shares important credit card terms, including interest rates and fees, to potential applicants. The box allows consumers to compare credit card terms more easily and mostly eliminates hidden costs that can be buried in fine print. It was named after Sen. Charles Schumer and was included in the Truth in Lending Act.
[Read: The Best Cash Back Credit Cards of 2018.]
26. Secured card: A type of credit card that requires a security deposit as collateral — typically made in cash — in case the cardholder defaults on payments. Secured credit cards are typically designed for people who are new to credit or have a low credit score. In most cases, the cardholder will receive the deposit back when the account is closed or upgraded to an unsecured card after responsible use and on-time payments. Some secured cards, such as the Discover it Secured, however, may return the deposit sooner.
“Building credit requires you to have open, active, positively reported accounts on your credit report,” says Irby. “Since a security deposit can be used as collateral to gain approval, secured credit cards give credit-troubled consumers a chance to build a positive payment history.”
27. Sign-up bonus: Some credit cards offer a one-time bonus to new cardholders, often after they spend a certain amount within a set period. For example, you may need to spend $3,000 in three months to receive a bonus worth $500. Some cash-back credit cards offer sign-up bonuses of $100 to $200, and some premier travel cards offer bonuses of $500 or more.
28. Travel rewards: A type of rewards program that gives you points or miles you can use to book travel or receive a statement credit for travel-related purchases. General travel credit cards typically offer rewards that you can redeem for most types of travel. Airline and hotel credit cards, on the other hand, may restrict you to redeem your rewards through their loyalty program.
29. Variable interest rate: Most credit cards charge a variable interest rate. This means that your APR can change based on what’s called the prime rate. This is a base rate that banks reference when setting rates for various financial products, including credit cards and loans.
The prime rate typically fluctuates based on the federal funds rate, which is what banks charge each other for short-term loans. The federal funds rate is set by the Federal Reserve.
30. Zero percent APR: Many top credit cards offer an introductory zero percent APR promotion on purchases, balance transfers or both. This promotion allows you to pay off a new purchase or pay down a transferred balance with no interest for a set period. If you don’t pay off the balance before the promotion ends, you’ll owe interest on the leftover amount.
In contrast, deferred-interest promotions offer no or low interest on large purchases for a set period. The difference is that if you don’t pay off the balance in full before the deferred-interest promotion ends, you’ll owe interest based on the original purchase amount.
The Takeaway
The more you know about your credit card and how it works, the easier it is to use it responsibly and extract more value out of it. As you learn more about credit cards and their various terms and features, you can improve your chances of getting the best credit card for your needs.
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30 Terms Every Credit Card Owner Should Know originally appeared on usnews.com
