Glossary of Terms You Should Know
Annual Fee: Some card issuers assess this flat fee each year for use of the
credit card.
Annual Percentage Rate (APR): The APR provides the true cost of credit
expressed as one number that enables you to compare different credit cards.
Card issuers may use different APRs to compute the finance charges on
outstanding balances for purchases, cash advances, and balance transfers.
Average Daily Balance: Card issuers look at your average daily balance to
calculate the finance charges on your account. The average daily balance is
calculated by adding the daily balances over a period of time (billing cycle)
and dividing by the total number of days in that period.
Balance Computation Method: This refers to the method the card issuer uses to
determine the balance for purchases on which the finance charge is computed.
Examples include average daily balance and two-cycle average daily balance.
Billing Cycle: The billing cycle is the interval between the days or dates of
the periodic statements. The usual billing cycle is between 20 and 30 days. It
cannot exceed three months.
Cash Advance: The cash advance option enables you to borrow cash using your
credit card. The cash advance limit may only be a small percentage of your
credit limit. Cash advances usually carry higher finance charges than purchases
or balance transfers. Typically, they do not have grace periods for repayment.
Finance charges begin to accrue the day of the cash advance transaction.
A cash advance fee may also be charged for this extension of credit that comes
in the form of cash.
Cash Line: This is the amount available for cash advances.
Change-in-Terms Notice: Card issuers are required to give 15-day advanced
written notice of any changes in terms on the credit card account. Exception:
no advance notice is required if a rate increase is due to default or delinquency.
Effective July 2010, creditors will be required to give 45-day written notice. The notice will
include any increases triggered by default or delinquency.
Charge Card: A charge card is similar to a credit card except that balances
must be paid in full at the end of each billing cycle.
Credit: Credit enables you to defer payment of debt or to incur debt and defer
its payment; buy now, pay later.
Credit Card: This is usually a plastic card that may be used repeatedly to
borrow money or buy products and services, and pay for them at a later date.
Credit cards are issued by banks, savings and loan institutions, retail stores,
and other businesses.
Credit Report: This report contains detailed information on your credit history.
The report includes identifying information and details about your credit
accounts, loans, bankruptcies, late payments, and recent credit inquiries.
Prospective creditors will obtain these reports, with your permission, to
evaluate your creditworthiness. Every year you should order a free copy of your
credit report and review it for accuracy.
Credit Score: Your credit score is a measure of the risk you pose to someone
who wants to lend you money. It is calculated using a standardized formula.
Late payments and poor credit card usage can damage your credit score.
Lenders use your credit score to determine what interest rate to charge. The
better your credit score, the better the rate you can get from a card issuer.
Default Rate: This is the APR that will apply to your balance in the event that
you default. For example, if you make one late payment or exceed your credit limit,
these actions may trigger a higher APR on your account. (See Penalty APR).
Effective APR: The effective APR is disclosed on the periodic statement. It
reflects the cost of interest and certain other finance charges imposed during
the statement period.
Effective July 2010, card issuers will no longer be required to disclose the effective APR,
as the term was found to be confusing to consumers. In place of the effective APR, card
issuers will be required to disclose interest and fee totals for the month and the year-to-date
as a means of informing consumers of the cost of their credit.
Finance Charge: This is cost the of credit expressed as a dollar amount.
Fixed Rate: The fixed rate is a predetermined interest rate that does not change
during the entire loan term.
Effective July 2010, creditors will only be allowed to advertise an open-end account as a
“fixed” rate account if the advertisement provides a specific fixed rate period and the rate
will not increase during that period. If no time period is specified, the creditor can only
use the term “fixed” if the rate will not increase while the plan is open.
Foreign Transaction Fee: This is a fee that card issuers often assess for
purchases made overseas.
Grace Period: The grace period is the date by which or the period within which
any credit extended for purchases may be repaid without incurring a finance
charge. If no grace period is provided, that fact must be disclosed. If the length
of the grace period varies, the card issuer may disclose the range of days, the
minimum number of days, or the average number of days in the grace period, if
the disclosure is identified as a range, minimum, or average. If you do not pay
off your balance in full each month, you will not be able to take advantage of
the grace period; finance charges will continue to accrue on your balance.
Late Fee: This is a flat fee that the card issuer will charge you if you do not
make the minimum payment by the required due date. The fee amount must be disclosed to you when you open your account. In addition to disclosing the required due date for your credit card bill, many card issuers include a cut-off
time by which you must pay to avoid a late fee.
Effective July 2010, the cut-off time for receipt of mailed payments must be reasonable;
5:00 P.M. or later is considered reasonable under the new regulation. In addition, when
mailed payments are not accepted on the due date because it falls on a weekend or holiday,
card issuers must consider payments received on the next business day to be timely.
Minimum Monthly Payment: This is the smallest amount you can pay each
month on your credit card balance to avoid a late fee. The minimum monthly
payment is based on your account balance. These days the required minimum
monthly payment is between two and four percent of your balance. Most of
the minimum monthly payment covers interest and little if no principal.
Effective, July 2010, card issuers must provide (1) a “warning” statement indicating that
making only the minimum payment will increase the interest the consumer pays and
the time it takes to repay the consumer’s balance; (2) a hypothetical example of how long
it would take to pay a specific balance in full if only minimum payments are made; and
(3) a toll-free telephone number that consumers may call to obtain an estimate of the
time it would take to repay their actual account balance using minimum payments.
Open-End Credit: Commonly referred to as revolving credit, open-end credit
is consumer credit extended by a creditor under a plan in which:
- The creditor reasonably contemplates that the cardholder will make
repeated transactions;
- The creditor may impose a finance charge from time to time on an
outstanding unpaid balance; and
- The amount of credit that may be extended to the consumer during the
term of the plan (up to any limit set by the creditor) is generally made
available to the extent that any outstanding balance is repaid.
Over-the-Limit Fee: This is a flat fee that card issuers will charge if your
balance (which includes purchases, balance transfers, cash advances, fees,
and interest) goes over your credit limit.
Penalty APR: Beginning in July 2010, card issuers will be required to use the
term “penalty APR” in place of “default rate.” In table format (the Schumer
Box), they will disclose the rate, the specific actions that trigger the penalty
APR (such as late payment), the rate that will apply, and the duration of that
rate if it will expire or, if applicable, the fact that the rate is indefinite.
Periodic Rate: This is the finance charge rate that may be imposed by a creditor
on a balance for a day, week, month, or other subdivision of a year.
Periodic Statement: The card issuer is required to provide this statement which
shows all of your account activity for the billing cycle. Typically, you will receive
the periodic statement each month.
Regulation AA: The Federal Reserve’s Regulation AA in part prohibits unfair or
deceptive acts or practices in violation of the Federal Trade Commission Act.
Recently, the Federal Reserve Board amended the regulation to prohibit unfair
or deceptive acts or practices by banks in connection with credit card accounts.
The new rules are effective July 1, 2010.
Regulation Z: The Federal Reserve’s Regulation Z implements the consumer
credit protections of the Truth-in-Lending Act. The regulation prescribes uniform
methods of computing the cost of credit, disclosure of credit terms, and
procedures for resolving errors on certain credit card accounts. Regulation Z
applies only to consumer credit, not business or commercial credit. The Federal
Reserve Board recently amended Regulation Z to improve the effectiveness of
the disclosures that creditors provide to consumers for credit card accounts.
The new rules are effective July 1, 2010.
Schumer Box: Regulation Z requires that card issuers disclose certain terms
and costs of the card in a standardized table known as the Schumer Box.
The Schumer Box is named for the New York Congressman responsible for
the legislation intended to help consumers focus on the important terms of
their credit card agreements.
Secured Credit Card: This is a credit card that is linked to a savings account; the
funds can be claimed by the issuing credit card company should the cardholder
fail to make payments.
Subprime Credit Card: Card issuers generally offer these cards to consumers
with low credit scores or credit problems. Subprime credit cards often have
substantial fees associated with opening the accounts, higher interest rates and
possibly a required security deposit. They also tend to have low credit limits.
Teaser Rates: These are low rates that lenders offer for a limited period of time
to make their products more attractive. For example, card issuers offer qualified
borrowers cards with an introductory zero percent APR. At the end of the specified
period, the card will revert to a higher variable APR.
Two-Cycle Billing: Some card issuers use this method to calculate interest on
credit card accounts. When a consumer pays the entire account balance one
month but does not do so the following month, the card issuer calculates
interest charged for the second month using the account balance for the days
in the previous billing cycle as well as the current cycle. For example, you
have an average daily balance in January of $2,000. You pay off the balance
in full. In February, your average daily balance is $1,000. You only pay $500
at the end of the billing cycle. A lender using the two-cycle billing method will
calculate the interest you will pay not on the outstanding balance of $500, but
rather on the average daily balance of both January and February.
Effective July 2010, card issuers will be prohibited from using this method.
Truth-in-Lending Act: See Regulation Z.
Universal Default: Some card issuers practice universal default whereby they
will automatically raise the rate on your card if you default with another lender.
Variable Rate: Most credit cards have variable interest rates—rates that can
move up and down. The variable rate is usually tied to an index such as the
prime interest rate.
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