Understanding Credit Cards Part 2: Can You Speak the Language?
The book on credit cards is filled with many
terms and phrases. In recent years, the government and financial institutions have taken steps
to make your monthly statements more easily understood. Still, there are some terms that
may require explanation. Let’s look at some of the key ones.
Annual percentage rate, or APR, is basically the interest rate that you’ll pay on an
unpaid balance. The finance charge isn’t the APR. Instead, it’s the total dollar
cost to borrowing money, including interest and fees.
A card issuer is any financial institution, such as a credit union or bank, that issues
plastic credit cards. The annual fee is the yearly charge for having
a credit card. Sometimes this fee is assessed in monthly installments.
Grace period: Most cards grant you this period of time to pay off your purchase without accruing
interest. The billing cycle is the time between billing
statements, and that’s typically between 28 and 31 days. Remember, you can make payments
on your credit card any time. You don’t have to wait for your monthly statement to
arrive. Average daily balance: This is the method
most credit cards use to calculate your interest. It’s determined by adding each day’s balance,
and then dividing that total by the number of days in the billing cycle. To clarify,
interest is based on the average daily balance, not the remaining balance after you’ve made
a payment. A cash advance fee is charged when you get
cash with your credit card, or when you move money from your card’s account to another
account. Often, there is no grace period for this type of transaction, so interest starts
accruing immediately. A co-signer is someone who signs an agreement
to pay off a loan in the event the primary signer does not pay it.
Join me in video three to learn about traditional and rewards cards.