Smart Borrower Center
Tools to help you borrow better
If you’re like most people, you rarely read any of those official-looking agreement notices sent to you by your credit card company. To do so would take a magnifying glass, a dictionary and several hours to get through all that fine print. But if you don’t understand the basic terms of your credit card agreement – such as your APR, your grace period and your balance transfer fee -- you could be asking for trouble. In most cases, the credit card issuer has the right to change the terms of your agreement at any time as long as they notify you – even if it is in tiny type. That’s why we’re giving you this glossary of important credit card terms, in the hopes of helping when you do sit down and sort out your credit card agreement. You, however, will have to supply the magnifying glass.
1. APR
Otherwise known as your Annual Percentage Rate. It’s the interest that companies charge, per year, on your credit card balance. It could be a fixed rate or a variable rate, fluctuating with a selected index, such as the prime lending rate. Be aware that even if your rate is “fixed,” it can still change as long as the issuer gives you a few weeks notice. Divide your APR by 12 to get your monthly periodic rate.
2. Average daily balance
Calculated by adding each day’s balance and then dividing that sum by the number of days in the billing cycle. This is the method by which most card companies calculate your interest due.
3. Balance transfer
When you transfer the money you owe on one credit card to another credit card, usually with a lower interest rate. Beware of balance transfer fees, however, which could cancel out the savings you reap from the lower interest rate.
4. Cash advance
Essentially a cash loan from your credit card issuer to you. Typically they carry a fee and a hefty interest rate.
5. Grace period
The amount of time you have between your transaction date and billing date, during which you won’t pay interest on your purchase. Usually, the grace period is between 20 and 30 days. If you carry a balance on your credit card, you have no grace period, and interest starts accruing as soon as your purchase is processed. For cash advances, there is typically never a grace period.
6. Minimum monthly payment
The amount you must pay on your monthly credit card bill to keep from going into default. It’s often two percent of your outstanding balance.
7. Teaser rate
A lower-than-average introductory interest rate that a credit card issuer offers to entice you to switch to their card. Your interest rate honeymoon usually will only last a few months, however.
Published on October 22, 2007