Are you familiar with the basic credit card terms?
Knowing the basic credit card terms can be the difference of you getting a loan for a new home, or not being able to be approved for even a credit card.
Listed below are 10 common credit card terms you will see in the credit world that you should be familiar with.
1. Credit score
This is probably the most popular of all credit card terms that you hear being tossed around.
A credit score is a 3 digit number that is used to determine your creditworthiness.
A credit score is calculated by several factors based on a credit report, and all of this information is usually sourced from the credit reporting companies.
Lenders use your credit score to determine how responsible you are and if they want to give you a loan.
Since your credit score is based on factors such as your payment history, if your credit score is low, it likely means that you have a history of missing payments.
This is a red flag for lenders who will likely not give you a loan, and if they do, the loan will come with very high-interest rates.
2. Credit limit
Next on our list of credit card terms is credit limit.
When you’re approved for a new credit card, you will receive what’s called a credit limit.
A credit limit is essentially the most you are allowed to spend on a credit card.
For example, if you are approved for a credit card and receive a $2,000 line of credit (your credit limit), then you cannot spend more than $2,000 on that credit card without first paying down the balance.
A credit limit can vary from high to low depending on several variables such as your income, credit score, and other factors.
Credit card issuers will often increase your credit limit if you’ve consistently been using the card responsibly. Alternatively, you can request that your credit limit be increased.
3. Minimum payment
The minimum payment on a credit card is the amount you are required to pay by the due date to avoid any fees.
Most credit cards have a minimum payment of $25.
This means if you purchased a new jacket that cost $50, you now have a credit card balance of $50. In order to avoid fees, you must at least pay $25 on that $50 due balance.
I want to add an important caveat—if you want to avoid interest fees, then you should pay your balance in full each month.
Say you bought that $50 jacket, paid the minimum $25 payment and still had a $25 balance on your credit.
Well, guess what?
The credit card issuer will charge you interest on the remaining $25 balance that you are carrying on your credit card.
This means instead of having to pay back just $25, you will now have to pay back $25 plus any interest that was charged.
Nooooo, thank you ?♂️. Pay your cards off in full each month to avoid this.
4. Late payment fee
You are charged a late payment fee if you do not pay at least the minimum payment on your credit card balance by the due date or at the end of the grace period (more on the grace period later in this article).
For example, if your credit card has a minimum payment of $10, your late fee can’t be higher than $10.
If your credit card has a minimum payment of $1 (this would never happen), your late fee can’t be higher than $1.
Many credit cards have a minimum payment of $25, which means if you are late on a minimum payment, you will be charged a $25 late payment fee.
5. Annual fee
You’ve likely heard this credit card term before.
An annual fee on a credit card is a yearly fee that you’re required to pay if you wish to remain a member of that credit card.
“Joshua, why the heck would I pay money to spend money???”
Great question! I used to wonder the same exact thing.
Oftentimes the rewards and benefits of the card outweigh the cost of the annual fee, making it worth the price.
However, this is not the case for every credit card.
In any case, annual fees vary from card to card. A cheaper annual fee will have you paying $25 per year, but higher-end cards can have fees of up to $500 per year ?.
6. Annual percentage rate (APR)
The APR is the annual cost of a loan to a borrower (you).
Not to be confused with your interest rate, the APR is exclusively intended to give you more information about how much you’ll pay for a loan.
To help you better understand APR, let’s compare APR to interest rate.
Interest rate is the percentage of the principal that a lender charges you to borrow the money. APR is the annualized representation of your interest rate and includes other factors such as fees.
Now, when it comes to credit cards, the APR and interest rate are typically the same thing.
7. Grace period
The grace period is the time between the end of your credit card’s billing cycle and the due date of your minimum payment.
Many credit card issuers offer grace periods, and they are required to last at least 21 days.
The purpose of a grace period is to give you time to pay your credit card balance so that you won’t be charged interest.
Grace periods only apply to credit cards that carry a balance.
If you pay your credit card balance in full each month, you won’t be charged any interest, and so a grace period isn’t necessary.
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8. Revolving balance
A revolving balance (not to be confused with revolving credit) is the portion of your credit card balance that goes unpaid at the end of a billing cycle.
Your credit card issuer will charge interest on the balance owed which is why it’s imperative that you pay off your balances in full each month.
For example, if you purchased a new pair of jeans that cost $50, and make a minimum payment of $25, you still have a balance of $25.
When the billing cycle ends, you now have a revolving balance and your credit card issuer charges interest on that $25 balance.
Interest rates vary depending on many variables such as your creditworthiness but often fall between 10% and 20%.
9. Security code (CVV)
Other than your credit score, the CVV may be the most recognized of all credit card terms.
The security code, or credit verification value (CVV), is a 3 digit number on your credit card or debit card used to reduce fraud.
On American Express® cards, the CVV is a 4 digit number.
These numbers can be found on the back on your card (on the front of AMEX cards) and are often used for online purchases to verify that you have the physical card at hand.
Credit cards are not the only type of card that use CVV’s, you will also find these on debit cards, and even some gift cards.
10. Due date
The due date on a credit card is the day that a minimum payment is due.
If you miss the minimum credit card payment by even a single day after the due date, you could be charged a late fee.
Continuing to miss payments can result in additional late fees, increased interest rates, and of course negative impacts on your payment history which is the highest factor when determining your credit score.
Really, the due date on a credit card is no different than the due date on an assignment in school. If the assignment is late, you pay the penalty of a bad grade.