Credit cards can be a great asset when used responsibly. But if you are new to using credit cards or have been using one without knowing what a bunch of words on your statement means, you could be in for some unpleasant surprises. 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 maximise the value you get out of every credit card you'll ever own.
Here are some credit card terms and their definitions, so you can better understand how your card works and avoid any financial traps.
1. Annual Maintenance Charge
This is popularly known as ‘annual fee’ and is not really a ‘hidden’ charge. The annual fee is charged once in a year and the amount varies card to card. Sometimes, banks offer free credit cards which means that there will be no joining fee or annual fee on the card for a certain time period or for a lifetime.
2. APR (Annual Percentage Rate)
The annual percentage rate (APR) is the interest rate charged on outstanding credit card balances outside the due date. APR is expressed in per cent per annum. A common misunderstanding about credit cards is that interest is charged on everything you swipe or borrow through your card. However, the truth is you will be charged for keeping an outstanding balance on your account over the interest-free grace period, which is usually 30-45 days from the payment due date (differs from bank to bank). So effectively if you pay the entire outstanding amount within the billing cycle, you will never have to pay interest on the money you use on credit.
3. Balance
In credit, this is the amount of money borrowed. You will have a balance owed until you pay it off in full, which, if not paid on time, can include interest and extra fees.
4. Balance Transfer
A balance transfer is the process of moving an unpaid credit card debt (also known as your balance) from one issuer to another. Consumers typically make a balance transfer from a high interest credit card to a new card that charges little to no interest, so they can save money and consolidate debt.
5. Billing Cycle
A billing cycle is the period of time between your credit card billing statements. These typically range from 20-45 days, depending on the credit card and the issuer.
6. Billing Statement
Credit card issuers send a monthly statement to cardholders that summarizes purchases made and payments due, balance credits and finance charges. If a credit card offers its users a rewards program, then the statement also contains the updated log of points earned.
7. Cash Advance
This is a cash loan from a credit card using an ATM or bank withdrawal. Cash advances occur when you use a credit card to obtain cash from an ATM, make a wire transfer, buy foreign currency, travelers’ checks, or money orders, or cash an access check. Many issuers charge a fee (typically around 3% of the total amount) for accessing the cash credit line on an account.
8. Credit Limit
Your credit limit is the amount of credit available to you and is the maximum amount you can borrow. The maximum spending limit is determined by the kind of card you own.
9. Credit Report
A credit report is an aggregation of your credit history. Credit reports include detailed information on credit accounts, such as payment history, balances, account opening date and more. The information from a credit report is summed up in a credit score.
10. Due Date
The due date is the date by which you must make at least pay the 'minimum amount due' in the case where you are not able to pay your bill in full. Paying outside the due date will cost you late fee charges as well as get reported on your Cibil report as a negative mark. Some card issuers allow you to set your convenient date for card payment and others set a standard due date. For payments whose due dates fall on weekends or holidays, the due date would be the next business day.
11. Finance Charge
A finance charge is the interest charged on the amount you owe. This does not just include interest fees but also balance transfer fees, cash advance fees, late fees, overlimit fees, and any other fees you may have on your account.
12. Grace Period
The grace period refers to a period of time in which you are allowed to pay your credit card bill without being charged a finance and/or late fee. This period typically ranges from 21 to 25 days before you start incurring interest. If there is no grace period, charges will be applied immediately.
13. Late Payment Fee
A late payment fee is charged when you miss paying the minimum amount due by the payment due date. Late payments may affect your Cibil score negatively even if your entire outstanding balance is paid in full at a later date.
14. Minimum Amount Due
This is usually a small per cent (usually 2-5 per cent) of your total amount outstanding. This is the minimum amount a cardholder should pay within the due date to keep the account from going into default.
15. Previous Balance
The method by which some card-issuing banks base their charges on the amount owed at the end of the previous billing cycle.
16. Zero Balance
What shows on a credit card holder's bill when all outstanding dues are paid and no new purchases have been made during the billing cycle.
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.
