As you use credit and learn more about how credit works, you’ll probably come across some of the same terms over and over. It will help to understand these terms so you’ll better know how you should and shouldn’t use credit. These are some key credit terms you should know.
The annual percentage rate (APR) is the annual cost of carrying a credit card balance. This is also known as your interest rate. Your APR is broken down to a periodic rate that allows your credit card issuer to charge interest on a monthly or daily basis. The periodic rate is your APR divided by the number of days or number of billing cycles in the year.
A balance transfer is a type of transaction that allows you to move the balance from one credit card onto another credit card. You may have to pay a fee for transferring your balance.
A cash advance is a transaction that allows you to withdraw cash against your credit limit. You typically must pay a cash advance fee and a higher interest rate on the cash advance. Your cash advance limit may be lower than your credit limit available for purchases.
A credit card is a plastic card that gives you access to a credit account, which has been extended to you by a bank. Purchases made using your credit cards are added to your credit balance and should be repaid by a certain date that’s outlined in your credit card agreement.
A credit report is a document that contains payment details about many of your credit-based accounts (like credit cards, loans, and debt collections) and serious public records (like foreclosure and bankruptcy).
A credit score is a numeric summary of the information in your credit report. Credit scores usually range from 300 to 850 with higher scores being better. Your credit score is used to quickly decide whether your credit card and loan applications should be improved.
A finance charge is a fee that’s assessed when you carry a credit card balance beyond the grace period. The finance charge is based on your APR and your credit card balance.
A fixed interest rate is an interest that can only change when the credit card issuer notifies you in advance of the rate change. You have the right to reject changes to a fixed interest rate.
The grace period is the amount of time you have to pay your balance in full without being charged interest. Grace periods range from 20 to 25 days and usually apply only when you start the billing cycle without a credit card balance.
A variable interest rate is an interest rate is an interest rate that fluctuates over time based on an underlying interest rate, like the prime rate. Your credit card issuer doesn’t have to notify you before changing a variable interest rate.