Definition Of 15 Important Credit Card Terms

card terms and fees before you agree to open a credit or charge card account. These terms and conditions should generally be disclosed in credit card applications or in any credit card solicitations that require no application. You can also ask about these terms when shopping for a card.

Lack of understanding these terms in fine print and exactly what the credit card offers and requires could lead you into deep debt. Here are some definitions of some of the frequently used and important terms to consider before applying for a credit card.

#1. Cash Advance Fee - This is a charge by the bank for using credit cards to obtain cash. This fee can be stated in terms of a flat per-transaction fee or a percentage of the amount of the cash advance. For example, the fee may be expressed as follows: "3%/$15". This means that the cash advance fee will be the greater of 3 percent of the cash advance amount or $15.

Depending on the bank issuing the card, the cash advance fee may be deducted directly from the cash advance at the time the money is received or it may be posted to your bill as of the day you received the advance. The banks may limit the amount that can be charged to a specific dollar amount. Generally, it is advisable not to use you credit card to withdraw cash as the cost of a cash advance is always higher because there generally is no grace period. Thus, interest accrues from the moment the money is withdrawn.

#2. Average Daily Balance - This is the method by which most credit cards calculate your payment due. An average daily balance is determined by adding each day's balance and then dividing that total by the number of days in a billing cycle. The average daily balance is then multiplied by a card's monthly periodic rate, which is calculated by dividing the annual percentage rate by 12. A card with an annual rate of 18 percent would have a monthly periodic rate of 1.5 percent. If that card had a $500 average daily balance it would yield a monthly finance charge of $7.50.

#3. APR(Annual Percentage Rate) - This is the yearly rate of interest that includes fees and costs paid to acquire the loan. Lenders are required by law to disclose the APR. The rate is calculated in a standard way, taking the average compound interest rate over the term of the loan, so borrowers can compare loans.

#4. Balance Transfer - This is the process of moving an unpaid credit card debt from one issuer to another. Card issuers sometimes offer teaser rates to encourage balance transfers coming in and balance-transfer fees to discourage them from going out.

#5. Card Holder Agreement - This is the written statement that gives the terms and conditions of a credit card account. The cardholder agreement is required by Federal Reserve regulations. It must include the Annual Percentage Rate, the monthly minimum payment formula, annual fee if applicable, and the cardholder's rights in billing disputes. Changes in the cardholder agreement may be made, with written advance notice, at any time by the issuer. Rules for imposing changes vary from state to state, but the rules that apply are those of the home state of the issuing bank, not the home state of the cardholder.

#7. Floor - This is the minimum rate possible on a variable-rate loan or line of credit, after any initial introductory rate period. For example, on a credit card with the Prime rate as its index, no matter how low the Prime rate drops, the rate on the line may never decrease below the stated rate floor.

#7. Finance Charge - This is the charge for using a credit card, comprised of interest costs and other fees.

#8. Minimum Payment - This is the minimum amount a cardholder can pay to keep the account from going into default. Some card issuers will set a high minimum if they are uncertain of the cardholder's ability to pay. Most card issuers require a minimum payment of two percent of the outstanding balance.

#9. Free Period This is also called a "grace period," a free period lets you avoid finance charges by paying your balance in full before the due date. Knowing whether a card gives you a free period is especially important if you plan to pay your account in full each month. Without a free period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account. If your card includes a free period, the issuer must mail your bill at least 14 days before the due date so you'll have enough time to pay.

#10. Over-The-Limit Fee - This is a fee charged for exceeding the credit limit on the card.

#11. Pre-Approved - This is a credit card offer with "pre-approved" only means that a potential customer has passed a preliminary credit information screening. A credit card company can spurn the customers it invited with "pre-approved" junk mail if it doesn't like the applicant's credit rating.

#12. Periodic Rate - This is the interest rate described in relation to a specific amount of time. The monthly periodic rate, for example, is the cost of credit per month; the daily periodic rate is the cost of credit per day.

#13. Teaser Rate - This is also the introductory rate, it is the below-market interest rate offered to entice customers to switch credit cards or lenders.

#14. Variable Interest Rate - This is the percentage that a borrower pays for the use of money, and which moves up or down periodically based on changes in other interest rates.

#15. Secured Card - This is a credit card that a cardholder secures with a savings deposit to ensure payment of the outstanding balance if the cardholder defaults on payments. It is used by people new to credit, or people trying to rebuild their poor credit ratings.

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