Getting a credit card for the first time (or even having one for a while) can be exciting, but it’s also daunting if you don’t understand what everything means.
Here are ten terms everyone needs to know in order to be a responsible credit card owner.
Some credit cards charge a yearly fee for its use and the added benefits that come with the card. It’s recommended to find a card without an annual fee, but sometimes the benefits are more important than the cost. Fees usually range between $25 and $500.
The grace period on credit cards is the time when interest is not charged after purchases are made, usually within the first few months of getting a credit card.
Annual Percentage Yield (APR)
The APR is the cost of borrowing money. Credit cards have multiple APR’s that dictate how much the rate is on purchases, balance transfers, or cash advances. The APR comes into play once the grace period is over and you are charged the interest on the purchases you made within your pay cycle.
Your credit limit is how much you can spend with that particular card. It’s established based on your credit history, how much income you earn, and your credit score. The credit limit is to make sure you are able to pay back the amount you borrowed and not default on the payments.
A credit score is kind of like your financial report card. It shows how likely you are to pay back the money you borrowed and shows credit agencies if you’re trustworthy or not. Your credit score is composed of data pertaining to your risk, such as how many cards you own, payment history, what your credit limit is in relation to how much you borrow, and how much you currently own. It’s a good idea to keep all these variables in mind when you’re thinking of either getting another card or trying to get a handle on the ones you currently have.
A credit card’s minimum payment is an algorithm of the current balance on it – usually 1 to 3% of the amount owed. This is the lowest amount you must pay by the due date to avoid incurring a penalty or fee.
Your due date is the final day to pay at least the minimum payment amount on your card. Not paying by your due date can incur a late fee. Also keep in mind that if your balance goes unpaid long enough, you can be reported to credit agencies and your credit score can be affected.
Late Payment Fee
A late payment fee is assessed when you miss your payment by the due date. The fee is based on your balance and are set by your credit card company. If you are continuously making payments late or if the payment is late more than 60 days, the APR will increase and the late payment will show up on your credit report.
A revolving balance is the amount that isn’t paid for at the end of a billing cycle. It rolls over to the next month and APR is applied. For example, if you have $800 borrowed on your credit card, but only pay $200 on the due date, then $600 will roll over to next month and be your revolving balance.
If you are paying your full balance every month within the grace period, you won’t have any revolving balance.
Security Code (CVV)
The security code, or CVV (Card Verification Value), is a code on the back of credit cards that’s used to protect your information. This feature allows online transactions to be more secure due to the required code and prevents card information from being stolen since the CVV code is separate from the information contained in the magnetic strip or chip of your card.