Credit Card Key Terms

Know general credit card terms when choosing or maintaining an account

Picking credit cards, whether for personal or business use, requires some research so that you know what you’re getting into before opening an account. Banks issue credit cards according to income, credit history and other criteria. They also attract business owners and consumers alike with features such as online account access, cash back, travel rewards and low-interest balance transfers.

However, there are common phrases and key terms written in fine print, otherwise known as the cardholder agreement, which are unfamiliar to many applicants. Yet, it is still the account holder's responsibility to follow the terms and conditions upon signing the credit card application. Use your credit cards wisely and learn to stay out of debt by identifying common credit card terms.

Annual percentage rate

Annual percentage rate, or APR, is the yearly cost of using the credit card. The percentage figure can be fixed or it can fluctuate according to market conditions. The APR applies to your account as long as a balance exists. It can be avoided if the balance is paid in full every month. 

Balance transfer

A balance transfer moves debt from one credit card to another. Transaction fees may apply depending on the bank. Balance transfers help consumers and business owners save money if the newer card features a zero or lower interest rate and better terms. 

Minimum monthly payment

Minimum monthly payment refers to a set amount of money you're required to pay on your credit card every month to avoid penalties. In general, the payment is usually 2% to 4% of the balance. 

Grace period

Grace period refers to the time period that you have to pay off your balance without penalty. This usually lasts between 20 and 25 days, starting from the date of your billing statement to the payment due date. The grace period applies only to purchases; cash advances begin accruing finance charges immediately. 

Finance charge

Banks apply a finance charge, or a fee, for using their credit cards. This happens whenever there is an outstanding balance each month. There may be different finance charges for purchases and cash advances. 

Average daily balance

Average daily balance is the formula used to calculate a credit card minimum payment. Banks calculate the payment by adding the everyday balance in a billing cycle, then dividing that figure by the total number of days in that cycle. 

Copyright © 2013 Business.com, Inc. All Rights Reserved.