Credit Card Terms and Fees
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If you have never dealt with credit cards before, your first encounter with them could be very shocking. Because of all the terms used in relation to credit cards, you might even get the feeling that what you hear is not English but some other strange language. You hear words like “APR”, “Zero Percent”, “Introductory Period”, “Debit”, “Credit”, “Balance”, “Secured Cards”, etc. and you might really be unable to understand what the talk is all about. And if it is up to you to choose what credit card to get, you might feel completely at a loss. This article will give you a basic idea of the most common terms in regard to credit cards. If you want to get a more in-depth idea, read the other articles on this site.
While there is certainly quite a lot of terminology involved in credit cards and in banking and finance as a whole, getting to know the terms that apply to credit cards is not so difficult. There are several basic terms that are the most important and getting to know only them is sufficient to be able to survive in the credit card jungle. Also, if you are to survive there, do not skip reading your card holder agreement, once you get your credit card. It might not be the most interesting paper to read but there are many important clauses and provisions there and it might be too expensive for you, if you skip them.
Probably the most important term that is related to credit cards is Interest Rate. Interest rate is the amount of money you pay as a price for the money you borrow from the issuer. Generally the higher the interest rate, the more money you will pay back to the issuer, though there are other factors that might change this – for instance the period over which you repay your debt can be more important than the interest rate alone.
When interest rates are concerned, the abbreviation you will hear most frequently is APR. ARP stands for Annual Percentage Rate. ARP is either fixed, or variable. When the ARP is fixed, it stays the same for the whole period and when it is variable, it can be changed at any time (but the issuer has to warn you in advance). It is quite likely that a single credit card can have 2 or more ARPs for different types of transactions – i.e. purchases ARP, balance transfer ARP or cash advance ARP. You can also see the term “Zero Rate”, which means that the card issuer will not charge you any interest for your purchases during the introductory period.
Another term that is related to credit cards is Credit Limit. This is the amount of money you are allowed to borrow. Most often you can exceed the credit limit but the fees and interest rates become so high that you will hardly want to do it. The money you borrowed is also your balance, which you repay in monthly payments. Each monthly payment consists of a principal and the interest rate, so if you repay your balance quickly, you will pay less interest. There are several methodologies for calculating balances and as a result of this, you get slightly differing results for the same amount of borrowed money and for the same interest rate.
All credit cards have a Grace Period and/or Introductory Period. During the grace period you don't owe interest for your debt. The introductory period is similar to the grace period but besides zero rate cards, all other cards might charge interest. Usually the interest rate for the introductory period is lower than for the rest of the credit card lifetime but again, this varies from one issuer to the other.
Fees are other very important term in credit card terminology. Fees can pump quite a lot of money out of your pocket. One of the typical fees credit card issuers charge you with is the annual fee. Annual fees vary from $19, to $99, to over a thousand dollars a year. As a matter of fact, there are more and more credit cards that come without an annual fee but if their interest rates and the other terms and conditions are not good, they are hardly a better deal. If your card has an annual fee, you pay it no matter if you use your card or not.
Besides annual fees, other common fees are the Late Payment Fees/Penalties and Transaction Fees. Late payment fees can be pretty high, so you'd better avoid paying late. Transaction fees are also very common and they include fees like balance transfer fees (when you transfer a balance from another credit card to your current one), cash advance fees (when you withdraw money at an ATM), overlimit fees, currency exchange fees, etc.