Credit Card Terms

Shopping around for a credit card can save you money on interest and fees. You’ll want to find one with terms and features that match your needs. This information can help you

Glossary

A credit card is a form of borrowing that often involves charges. Credit terms and conditions affect your overall cost. So it’s wise to compare terms and fees before you agree to open a credit or charge card account. The following are some important terms to consider that generally must be disclosed in credit card applications or in solicitations that require no application. You also may want to ask about these terms when you’re shopping for a card.

Adjusted Balance. This is usually the most advantageous method for card holders. Your balance is determined by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren’t included.

Additional Cards. Cards issued on an account not in the primary or secondary name. Additional cardholders are authorized to charge to the card and make payments. They can also check the balance and available credit on the account. Additional cardholders are not authorized to make changes to the account.

Annual Fees. Most issuers charge annual membership or participation fees. They often range from $25 to $50, sometimes up to $100; "gold" or "platinum" cards often charge up to $75 and sometimes up to several hundred dollars.

Annual Percentage Rate. The APR is a measure of the cost of credit, expressed as a yearly rate. It also must be disclosed before you become obligated on the account and on your account statements.

The card issuer also must disclose the "periodic rate" — the rate applied to your outstanding balance to figure the finance charge for each billing period.

Some credit card plans allow the issuer to change your APR when interest rates or other economic indicators — called indexes — change. Because the rate change is linked to the index’s performance, these plans are called "variable rate" programs. Rate changes raise or lower the finance charge on your account. If you’re considering a variable rate card, the issuer must also provide various information that discloses to you:

• that the rate may change; and
• how the rate is determined — which index is used and what additional amount, the "margin," is added to determine your new rate.

At the latest, you also must receive information, before you become obligated on the account, about any limitations on how much and how often your rate may change.

Automatic Payment, A service which automatically makes credit card payments by transferring funds from your checking or savings account to your credit card account.

Available Credit The amount of unused credit available. Available credit is computed by subtracting the outstanding balance from your total credit line.

Average Daily Balance. This is the most common calculation method. It credits your account from the day payment is received by the issuer. To figure the balance due, the issuer totals the beginning balance for each day in the billing period and subtracts any credits made to your account that day. While new purchases may or may not be added to the balance, depending on your plan, cash advances typically are included. The resulting daily balances are added for the billing cycle. The total is then divided by the number of days in the billing period to get the "average daily balance."

Balance. An outstanding amount of money. A checking or savings account balance refers to the amount of money in a particular account. A credit card balance refers to the amount owed. See also Outstanding Balance.

Balance Transfer. Allows you to use the available credit on one credit card and pay off another, ideally with a lower cost. Learn more about balance transfers.

Billing Cycle. The number of days in the billing period. It includes the day after the previous close date through the current closing date of the account.

Cardmember Agreement. A written document that provides details of your agreement with the credit card issuer.

Cash Advance. Cash withdrawn from the available credit of your credit card account. There is no grace period for cash advances. Interest accrues daily and at a higher APR until the complete balance is paid in full. Transaction fees may apply.

Cash Advance Check. A cash advance check works like a personal check except the amount is charged to your credit card account. This check can be written to your choice of recipients and for any amount up to your available credit limit. These types of checks are posted as cash advances and will incur a transaction finance charge.

Cash Advance Transaction Finance Charge. A fee assessed on the date a new cash advance transaction is posted to an account.

Charge Card. A specific kind of card that requires full payment of your balance with each billing cycle. Typically charge cards do not charge interest, but late fees can apply if full payment is not received by the due date.

Credit Line. Also known as Credit Limit, this is the maximum amount you can carry as the balance on your credit card. If you exceed this amount, an Over-the-Credit-Limit-Fee may be imposed.

Debit Card. A card issued by a bank that directly accesses available funds from a bank account, typically a savings or checking account.

Default. When a customer doesn’t make a required payment to a credit card account, or otherwise violates the terms of the agreement between the credit card company and the customer.

Finance Charge. Also known as interest, the finance charge is the fee for borrowing money. Finance charges may be imposed when you do not pay off your outstanding balance in full. See Monthly Finance Charge.

Float. When a cardholder makes a purchase or obtains an advance, the transactions may not post for a few days. The charge amount is not added to the balance of the account until the transaction does post. The time between purchase and posting is referred to as the float.

Free Period. 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.

Grace Period. Also called a "free period," a grace period is the period between the date of the credit card billing statement and the date payment in full must be received before interest begins to accrue on new purchases.

Interest. Also known as a finance charge, interest is the fee for borrowing money. Interest is listed on your credit card statement as the Monthly Finance Charge.

Interest Rate. The percent, per unit of time, that a bank or financial institution charges a customer for borrowing money. See Annual Percentage Rate.

Introductory Rates. Credit cards often offer lower introductory APRs as special promotional offers. After a period of time, the rate usually returns to the standard rate. It’s important to read the terms and conditions for all credit cards to fully understand how long the introductory rate will last and what the rate will be at the end of the introductory period.

Issuer. An issuer (or issuing member) is a financial institution which issues credit cards such as Visa® or MasterCard®.

Late Payment Fee. The charge that may be imposed if the Minimum Monthly Payment is not received by the Payment Due Date.

Minimum Finance Charge. If your account is subject to a finance charge, a minimum finance charge may apply. Please refer to your Customer Agreement and Disclosure Statement for the minimum on your specific credit card account.

Monthly Finance Charge. If your credit card balance is not paid in full, you will be charged a Monthly Finance Charge. The charge is calculated on the statement closing date by multiplying the Average Daily Balance on the account by the Monthly Finance Charge rate (the Annual Percentage Rate divided by 12).

Minimum Monthly Payment. The minimum dollar amount that must be paid each month to prevent a credit card account from being delinquent. The amount is based on the percentage of your Outstanding Balance or a minimum fixed amount.

Outstanding Balance. The amount you owe on your credit card. This is the balance used to calculate payments and on which interest is charged.

Overdraft Protection. You can link your credit card to your checking account for optional Overdraft Protection. If you overdraw your checking account, money will be transferred from your credit card account to cover the overdraft or avoid a bounced check (up to the available credit on your credit card account). There is a cash advance transaction fee associated with the transfer.

Over-the-Credit-Limit-Fee. The fee that may be imposed if your outstanding balance exceeds your credit limit.

Penalty Rate. A higher APR the credit card company charges after the customer has made late payments, exceeded their credit limit, or otherwise did not abide by the Cardmember Agreement.

Payment Due Date. The date when your payment must reach your bank to avoid a late payment fee (if applicable).

PIN. Personal Identification Numbers (PINs) are secret numbers that customers use to access their accounts via ATMs.

Prime Rate. Most credit card companies use the "prime rate" as a base rate (e.g., "prime + 12%"). The prime rate used is taken from the Money Rates column of The Wall Street Journal. The prime rate is merely a base rate used to make loans to certain borrowers. It is not necessarily the lowest or best rate at which loans are made.

Purchases. Credit card charges you make at merchants. Purchases usually have a lower APR than cash advances.

Secured Credit Card. A credit card that requires you to pledge collateral to receive credit. With a Secured Credit Card, your credit line is determined by the amount you deposit into a Collateral Account.

Total Finance Charge. The sum of the Monthly Finance Charge and any Cash Advance Transaction Finance Charges (or the Minimum Finance Charge, if applicable).

Unsecured Credit Card. A credit card that is not secured with collateral. A customer can qualify for unsecured credit based on their credit history and financial strength.

Balance Computation Method for the Finance Charge. If you don’t have a free period, or if you expect to pay for purchases over time, it’s important to know what method the issuer uses to calculate your finance charge. This can make a big difference in how much of a finance charge you’ll pay — even if the APR and your buying patterns remain relatively constant. See page 10 for examples of how the methods can affect your costs.

Pre-Approved. A potential customer who has passed an initial credit bureau evaluation.

Previous Balance. This is the amount you owed at the end of the previous billing period. Payments, credits and new purchases during the current billing period are not included. Some creditors also exclude unpaid finance charges.

Transaction Fees and Other Charges. A card may include other costs. Some issuers charge a fee if you use the card to get a cash advance, make a late payment, or exceed your credit limit. Some charge a monthly fee whether or not you use the card.

Examples of balance computation methods include the following.

This method gives you until the end of the billing cycle to pay a portion of your balance to avoid the interest charges on that amount. Some creditors exclude prior, unpaid finance charges from the previous balance.

Two-cycle Balances. Issuers sometimes use various methods to calculate your balance that make use of your last two month’s account activity. Read your agreement carefully to find out if your issuer uses this approach and, if so, what specific two-cycle method is used.

If you don’t understand how your balance is calculated, ask your card issuer. An explanation must also appear on your billing statements.

Zero Balance. When your billing statement shows no outstanding balance and no new charges have been incurred.

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Other Costs and Features
Credit terms vary among issuers. When shopping for a card, think about how you plan to use it. If you expect to pay your bills in full each month, the annual fee and other charges may be more important than the periodic rate and the APR, if there is a grace period for purchases. However, if you use the cash advance feature, many cards do not permit a grace period for the amounts due — even if they have a grace period for purchases. So, it may still be wise to consider the APR and balance computation method. Also, if you plan to pay for purchases over time, the APR and the balance computation method are definitely major considerations.

You’ll probably also want to consider if the credit limit is high enough, how widely the card is accepted, and the plan’s services and features. For example, you may be interested in "affinity cards" — all-purpose credit cards sponsored by professional organizations, college alumni associations and some members of the travel industry. An affinity card issuer often donates a portion of the annual fees or charges to the sponsoring organization, or qualifies you for free travel or other bonuses.

Special Delinquency Rates. Some cards with low rates for on-time payments apply a very high APR if you are late a certain number of times in any specified time period. These rates sometimes exceed 20 percent. Information about delinquency rates should be disclosed to you in credit card applications or in solicitations that do not require an application.

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