Learning the Language of Credit Cards

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shutterstock_5688673Travel back to any time period before the fifties when cash was king. It was a time when nearly every product or service was paid for with dollars and cents. An exception was when some stores issued credit on an individual basis, but only to their most loyal and responsible customers. Back then credit agreements were straight forward.

With the advent of faster, reliable and more affordable transportation, people began to travel more often for business and pleasure, creating the need for a more convenient way to pay for things. The first charge card issued to the general public wasn’t introduced until 1949. At that time it was a simple agreement between a consumer and a department store or gas station; borrow money and pay it back with interest added for the privilege.

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Over time card holder agreements grew to cover a variety of costs, fees and penalties. Over time, the Feds passed a variety of consumer protection laws that continued to alter and add to the terms cardholders would agree to when opening an account. Agreements these days are no longer simple agreements, filled with fine print and verbage sometimes causing people to scratch their heads in confussion. Many of the most important details are now shown using a Schumer box, a straight forward table covering the essentials.

The details of a credit card agreement are provided to protect consumers. Responsible borrowers are knowledgeable about those details, in addition to understanding the vocabulary used. A complete glossary would include more than a hundred definitions. Here are the key phrases to will help you better understand your credit card agreements.

  • Account Balance – The total amount of money you owe on your account.
  • Average Daily Balance – The method used to calculate most credit card payments, determined by adding each day’s balance and then dividing that total by the number of days in a billing cycle.
  • Annual Percentage Rate (APR) – The amount of interest paid on an outstanding balance over the course of a year calculated as a percentage so that you can easily comparison shop.
  • Balance Transfers – An option that allows you to move balances from one credit card account to another, usually to take advantage of a lower interest rate. A fee is charged for a transfer.
  • Credit Bureau – Reporting agencies that collect information on consumer credit usage. There are currently three main credit bureaus in the United States: Equifax, Experian, and Trans Union.
  • Credit Line Limit – The maximum dollar amount that can be charged on a specific credit card account.
  • Credit Rating (Score) – A numeric rating of your ability to manage debt.
  • Cash Advance – Convenience checks are issued to card holders to obtain cash from their credit card account. A fee is charged to taking out cash against a credit card account.
  • Finance Charges – The cost accrued for using a credit card, comprised of interest costs and other fees.
  • Grace Period – The period of time a lender allows between transaction dates and the billing due date to pay the balance off interest free. The standard grace period is usually between 20 and 30 days.
  • Introductory Rate – Sometimes called a teaser rate, this is a zero or low interest rate offer to entice new customers to open an account or transfer a balance from another account.
  • Minimum Payment – The amount you must pay to keep your account from going into default, typically between 2 and 3 percent of the outstanding balance.
  • Over-the-Limit Fee – You must opt in to allow a creditor to cover charges that go over your credit limit. Otherwise, any charges that exceed your credit limit are automatically denied.

Thoroughly review every credit card statement. Each will include statistics to help you better manage your account. You’ll know when your payment is due and the minimum you’re required to pay. Review all of your account transactions and summaries of your past statements. Learn the consequences of paying late, along with all fees and interest rates that apply to the various ways you can use the card.

Perhaps the most helpful information on your credit card statement is the inclusion of the total costs calculated by the bank to help you see the repercussions of paying only the minimum due each month. You’ll be shown in years and months how long it will take to pay off the balance in full when making minimum payments and how making larger payments will help save you money. The totals will show both interest and principal, which is eye-opening for many consumers.

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Using a credit card is a reflex for many people, which isn’t necessarily a bad thing. In fact without a history of using one, it will be harder to raise your credit score, as your credit card history is an important component of the calculations made by the credit bureaus. Responsible credit management is key to your financial future, so be sure to read all the details and fine print of any credit card or loan applications you are considering and get to know the terminology and language.

Noreen Ruth is a contributor to www.wowcreditcards.com and numerous financial-related blogs and websites. She specializes in credit and debt-related issues and enjoys educating consumers about the latest rules and regulations, as well as ways to build, improve and maintain good credit.