The fine print and various agreements, terms and services associated with your credit cards can be confusing. Many people feel knowing their interest rate and payment date is enough to keep them in good standing with lenders and protect their credit scores. To avoid fees and penalties -- and to make sure you don’t ding your credit score -- it’s a good idea to learn and understand the basic credit card terms.
The balance is the amount you owe a credit card issuer. For example, if you make $510 worth of charges, have your annual fee of $30 come due and generate $12 worth of interest during a month, your balance would be $552. If you make a payment, you subtract that from your balance. Knowing your balances and credit limits will help you know your debt-to-available-credit ratios. The lower the ratio, the higher your credit score.
The amount of interest you pay per year is the Annual Percentage Rate, usually noted as APR on your credit card statements. This is not the amount of money you will pay each year, only the interest rate at which you’ll pay. You APR may be different for purchases, cash advances and balance transfers. If you miss a payment, your APR may change. Check the length of a promotional APR to see when it changes and what the new rate will be.
Fixed vs. Variable Interest Rate
If your interest rate doesn’t change, you have a fixed interest rate. If your rate might increase or decrease during the year, you have a variable rate. Variable interest rates are usually tied to the Prime Rate, set by the Federal Reserve on money it lends to banks and other lenders. For example, your fixed rate might be 4.9 percent plus the prime rate. If the Fed raises the Prime Rate by .025 percent, your interest rate will rise .025 percent.
Fees and Penalties
Credit card companies makes some of their profits charging customers fees. You might pay an annual fee to have the card, incur a fee when you use an ATM, or be charged a fee when you miss a payment or go over your credit limit.
Late or Missed Payment
A late payment is a payment you don’t make on time, while a missed payment is one you don’t make during a billing cycle. Late and missed payments affect you differently. Credit card issuers usually require you to make a minimum payment each month and include this amount on each monthly statement; if you pay less than your minimum due, this counts as a missed payment. Depending on how late your payment is, a credit card issuer might report you to a credit reporting agency, damaging your credit score. You might be charged a fee for late payments or have your interest rate raised, including the rate on promotional balances.
Check your credit card agreement for the term, “Grace Period.” If you pay your complete balance by your due date, you might not be charged interest.
Transfers and Advances
When you move debt from one credit card to another, this is known as a balance transfer. To encourage you to move debt from one of your other cards to theirs, some lenders offer promotional rates on balance transfers, such as a low rate for several months to a year, or interest-free for the duration of the promotion. If you get cash using your credit card, such as a withdrawal from an ATM, you make a cash advance, which costs you interest, often charged at a rate higher than the one you have for purchases.
Sam Ashe-Edmunds has been writing and lecturing for decades. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards. He is an internationally traveled sport science writer and lecturer. He has been published in print publications such as Entrepreneur, Tennis, SI for Kids, Chicago Tribune, Sacramento Bee, and on websites such Smart-Healthy-Living.net, SmartyCents and Youthletic. Edmunds has a bachelor's degree in journalism.