When it comes to credit cards, not only can the wording credit issuers use be difficult to follow, but it can also be misleading — terms may seem to mean one thing, while they actually mean another. By misunderstanding these terms, you can get into serious financial trouble, and fall into serious debt.
A) Understanding Credit Card Terms-
When applying for a credit card, there are a few terms you should understand in order to know how credit cards work in general and how your particular credit card functions in comparison to others.
* Billing Cycle, Statement Closing Date, and Payment Due Date
One key credit term is the billing cycle. It’s the period of time between two consecutive statement closing dates, usually about a month long.
Your statement closing date comes at the end of the billing cycle when your card issuer generates a statement for you. Your payment due date, on the other hand, is the next time you must make a payment.
B) Statement Balance vs. Current Balance
The statement balance is the total amount you owe as of your last statement closing date. This doesn’t include anything you’ve purchased since your statement closing date if your payment due date has not yet passed. The current balance is the total amount you currently owe on your credit card account, regardless of any scheduled payments.
C) Grace Period
Your credit card grace period falls between your statement closing date and your payment due date. During this time, you won’t accrue interest on new purchases made during the previous billing cycle (as long as you’re not carrying a balance on your account from your last statement period). Here’s a simple example of how a credit card grace period may work:
- Your account starts with a $0 balance.
- You purchase a $500 plane ticket on July 1.
- Your billing cycle closes on July 15.
- Your payment is due on August 5.
- As long as you pay off your statement balance by August 5, you won’t accumulate interest charges.
D) APR (Annual Percentage Rate)
With credit cards, “interest” and “APR” are the same. Your interest rate is your APR. Loans are more complex — APR includes interest plus certain fees. It’s important to remember that APR is calculated differently than interest rates on loans. It can sometimes be annually, monthly, or even daily.
On a similar note, it’s important to know the difference between two common offers used to attract prospective credit card applicants: deferred interest and 0% introductory APR.
The deferred interest offers allow you to pay for a purchase interest-free for a predetermined amount of time. However, if the full starting balance isn’t paid off by the end of the period, you’re charged the full interest of the initial balance.
Cards with 0% introductory APR offers don’t accrue interest until the intro period is over. When compared to deferred interest, this is generally considered the better offer. Either way, make sure to pay off your balance in full before the end of the offer, otherwise, you could end up paying A LOT more money than necessary.
With both kinds of offers, the amount of time you have to pay off your purchases before the deferral/0% period ends can vary significantly by card.
E) Cash Advance
A cash advance allows you to take money out of an ATM through your credit card. Though this may seem like a great idea if you need quick cash, there are often high fees (an upfront fee and a higher interest rate) attached, which make a cash advance often cost more than it’s worth.
F) Credit Score vs. Credit Report
These are crucial terms to understand. A credit report outlines your history with credit, listing the details of accounts such as mortgages, car loans, credit cards, and personal loans. Each of the three credit bureaus collects its own information on you, so it’s important to review each report often to ensure its accuracy.
In contrast, your credit scores are based on your credit reports. They are usually determined by your payment history, the amount you owe, the types of credit used, how frequently you apply for new credit, and how long your accounts have been open. There are lots of different credit scores; the FICO brand is the most commonly used scoring brand in the U.S., and FICO itself provides a variety of credit scores.
Find the Right Card?
These terms are nearly always found when reviewing terms and conditions, as well as during the actual use and management of your card. Understanding what they mean and how they apply to you will help you determine if it’s the right card for you.