Confused by all the financial terms
and acronyms that have to do with
your credit cards and credit card
accounts? Here’s a quick down-and-dirty guide
to what all those words mean.
Interest – Interest is what
the credit card company charges you for letting
you use their money to pay your bills. It’s
usually expressed as an annual percentage rate,
and applies to any amount that you don’t pay
off each month. There may be different interest
rates for different part of your bill. Many credit
card companies charge you one rate of interest for
purchases that you make, and a second (higher) rate
of interest for cash advances. There may be one
rate of interest for balances below a certain amount,
and a second rate for balances above that amount.
A credit card company may also impose a higher interest
rate if you make a late payment.
Outstanding Balance – or
just ‘balance’ is the amount of money
that you owe on your credit card.
APR – Annual Percentage
Rate is the percent of your outstanding balance
that you’ll pay in interest charges expressed
as an annual figure.
Example: Your balance is $1000. Your APR is 6.9%.
Your interest this month is:
($1000 x .069)/12 or $5.75
Introductory APR – A lower
interest rate that credit card companies offer to
new customers as an incentive to get them to apply
for a credit card. Once the introductory period
is over your balance is subject to their regular
interest rate. You may also lose the introductory
rate if your payments are late.
Average Daily Balance –
Most credit card companies figure your interest
charge on the ‘average daily balance’
– literally, the average of how much is outstanding
on your card each day. To make things simple, let’s
say that on April 1, your outstanding balance was
$1000. On April 10, you charged $350 for a new computer,
making your credit card balance $1,350. On April
13, the credit card company posted your payment
of $150, making your balance $1,200. Your average
daily balance is:
9 days at $1000 - $9000
3 days at $1350 - $4050
18 days at $1200 - $21600
Total: $34650 / 30 (number of days in the month)
= $1155
So your interest charge for the month of April will
be $1155 x .069/12 or $6.64.
Due Date – The day of the
month when your payment must be received. If your
payment is later than the due date, you will incur
interest charges, a late fee and possibly be reported
to a credit reporting agency.
Grace Period – The amount
of time between when you make a purchase and when
the company starts charging interest on the amount.
Revolving Charge – Most
credit cards are ‘revolving charge accounts’.
You have the choice of paying your account in full
each month, or paying part of the balance based
on the outstanding balance
Credit Limit (or Spending Limit)
– The credit card company will establish an
amount that they are willing to make available to
you based on your credit repayment history. This
credit limit may increase as you use your card,
or you may be able to request an increase in your
credit limit if you need it.
