Credit Card Help - Credit Card Glossary
Affinity Credit Card - A credit card typically offered through a partnership between a lending institution and a nonfinancial organization such as a school or a nonprofit. Generally, the organization receives a small percentage of each purchase made on the card. Additionally, cardholders might receive discounts or special deals from the organization.
Amount Due - Refers to the minimum amount due (usually about 2% of the entire balance).
Annual Fee - A yearly credit card usage charge billed directly to the consumer's credit card account. Annual fees usually range from $15 to $85.
Annual Percentage Rate (APR) - A yearly interest rate used to determine finance charges. The APR must be disclosed for credit card purchases, cash advances, penalty rates, and so on.
Authorized User - Anyone a cardholder legally permits to use his or her credit card. Authorized users are not legally responsible for charges made to a card, and their credit scores are unaffected by their ability to use the cards.
Average Daily Balance - Daily totals of charges minus payments divided by the number of days in the billing cycle.
Average Daily Balance Billing Method - For this method of calculating interest, the average daily balance is multiplied by the monthly periodic interest rate.
Balance Transfer - A balance transfer occurs when you move the amount you owe from one credit card to another, ideally to get a lower interest rate. Balance transfers have an annual percentage rate (APR) that is often different from the APR for purchases.
Bankruptcy, Chapter 7 - A type of bankruptcy that sells nonexempt property and then uses the proceeds to pay back creditors.
Bankruptcy, Chapter 11 - A bankruptcy plan that requires a company or debtor to go through the process of reorganization. Usually involves a corporation or partnership, but individuals and proprietors can also file a Chapter 11 bankruptcy.
Bankruptcy, Chapter 13 - A type of bankruptcy in which the debtor does not have to immediately forfeit property, but the debtor must have a steady source of income and a specific repayment plan. Individuals usually have three to five years to repay the debt.
Cap - The maximum amount of an interest rate or a fee. An interest rate cap limits how much the charge for borrowing money can go up. A fee cap is the maximum amount you would have to pay for a balance transfer, for example.
Cash Advance - The use of a credit card to get cash. Cardholders typically get cash advances from ATM machines, and issuers typically charge a much higher APR for cash advances than they do for purchases.
Cash Advance Fee - A bank charge collected when a consumer uses a credit card to get cash. It is either a flat per-transaction fee or a percentage based on the amount of the cash advance. Some banks deduct the fee from the cash received; others charge the fee to the credit card account. Cash advance fees normally do not have a cap.
Consumer Credit Counseling - Typically a paid service for consumers that helps them set up a budget and repayment plan with creditors. The counselor also usually tries to work with creditors to lower interest rates and fees. Reputable services will provide some free counseling.
Credit Bureau - A company that gathers information about consumers' credit habits and then sells it to third parties that have a legal and legitimate need for it, such as creditors and employers. The reports they sell generally have information on consumers' debt and payment history, available unused credit, and loan application history. Equifax, Experian, and TransUnion are the three major national credit bureaus. Also known as a credit reporting agency or a consumer reporting agency.
Credit Card - A plastic card used for purchases that is linked to the cardholder's revolving line of credit with a financial institution.
Credit Limit - The maximum amount of money available for use on a revolving line of credit such as a credit card. Most experts say you shouldn't exceed 10% of your credit line for credit scoring reasons.
Credit Line - The amount of credit available on a revolving debt. Also referred to as credit limit.
Credit Rating - A numerical ranking based on a consumer's financial information reported by credit bureaus. It judges a consumer's ability to repay debts based on income and credit history and is expressed in numerical form such as a FICO credit score.
Credit Report - The details of your personal and financial history collected by a credit reporting agency, which is also called a credit file. Included is information on your debts and payments, available unused credit, and loan application history. Lenders review your credit report in determining whether to approve your requests to borrow money whether it's for a credit card, car loan, or mortgage. Landlords, employers, and insurers also view credit reports for decision-making purposes.
Credit Reporting Agency - A company that gathers information about consumers' credit habits and then sells it to third parties that have a legal and legitimate need for it, such as creditors and employers. Equifax, Experian, and TransUnion are the three major national credit reporting agencies. Also known as a credit bureau or a consumer reporting agency.
Credit Score - A formula that assigns numerical values to certain creditworthiness factors and then calculates the likelihood of a debtor repaying the debt. FICO credit scores, which most lenders turn to when making decisions about issuing credit, range from a low 300 up to 850.
Debit Card - A plastic card used for purchases that is linked directly to the cardholder's bank account, from which funds are taken for a purchase. PIN-based debit cards take the funds from the account almost immediately after a purchase. Signature-based credit cards take the funds from the account up to a few days later.
Debt Consolidation - Replacing multiple loans with a single loan. Debt consolidation usually results in a cheaper monthly payment but a longer term (or a longer length of the loan).
Debt-to-income Ratio - A financial percentage that compares the total amount paid toward debt to income. It is calculated by dividing your total monthly debt payments including home, auto, student loans, and credit cards by your monthly net income. Less than 30% is excellent, 30%-36% is good, 36%-40% is borderline, and 40% or higher is a red flag.
Default - Failure to meet the requirements of a financial or legal obligation, such as not making payments or going over the credit limit. It is also a description used on credit reports for accounts that have not been paid according to the terms and conditions. A default is usually reported after several delinquencies and is a negative indicator for credit scoring.
Default APR - Annual percentage rate charged if you fail to meet the terms on a credit card account, such as making a late payment, exceeding your credit limit, or if your payment to the card issuer is not honored (commonly called a bounced check).
Encryption Software - Software that websites use to protect customers' personal information, especially financial information. Encryption scrambles data so that only the person intended to receive the information can access it. It is important to ensure encryption software is being used before you send any type of personal information (such as credit card information) for an online purchase.
Extended Fraud Alert - A warning cardholders can ask the credit bureaus to place on their credit reports when they have been a victim of identity theft. In place for seven years, it requires that creditors contact you directly or meet you in person before they extend credit to you.
Federal Trade Commission (FTC) - A federal agency that works to protect consumers by enforcing consumer protection laws passed by Congress, including the Fair Credit Billing Act, Fair Credit Reporting Act, Equal opportunity Act, Fair Debt Collection Practices Act, Truth-in-Lending Act, and Home Ownership and Equity Protection Act. The FTC also issues regulations that lenders must follow and offers consumer advice.
FICO Score - The credit scoring system developed by Fair Isaac Corporation and used by most mortgage lenders and credit card issuers to determine the degree of risk potential borrowers pose. FICO scores range from 300-850. The higher your score, the better.
Finance Charge - Interest charged on outstanding credit card balances.
Fixed Rate - An interest rate that does not vary as much as a variable rate. Although some credit cards are advertised as having fixed rates, issuers can normally change a rate at any time as well as modify the terms and conditions.
Floor - The lowest possible rate you can receive on a credit card or other revolving loan. For example, if the terms of a credit card read "prime + 4% with a floor of 9%," your interest rate will still remain at 9%, even if prime drops below 5%.
Fraud Alert - A warning you can add to your credit report that lets potential creditors know that you may be a victim of identity theft and requires that they take extra steps to verify your identity before issuing credit.
Fresh Start - The status of a debtor after bankruptcy.
Gift Card - A card with a built-in spending limit (e.g. $25) that has been issued by a store or a lender, usually in exchange for payment, but sometimes as a reward. Department store gift cards may be used only in that store, while gift cards with a Visa, MasterCard, Discover, or American Express logo can generally be used wherever the card is accepted.
Grace Period - The amount of time you have, typically after a billing period ends, to pay off your credit card balance before you're charged interest. Typically 20 to 25 days long, a grace period is in effect only when you are not carrying a balance.
Hard Inquiry - A request for a copy of your credit report in response to your application for credit, which will be factored in when your credit score is being calculated.
Home Equity - The portion of the current market value of a home that is not financed by a mortgage or other loan. Typically includes the amount of the homeowner's down payment, principal payments on loans, and appreciation.
Home Equity Line of Credit (HELOC) - A credit line where the amount that the borrower owns outright in a home is used as the collateral. A maximum dollar amount is set by the lender, and the homeowner can use some or all of the credit line during the time frame determined by the lender. Typically, borrowers have more flexibility with the repayment terms on HELOCs than on other home loans.
Identity Theft - Your personal information is stolen and used to obtain credit, goods, services, and/or cash.
Index - A well-publicized interest rate that serves as the basis for making changes to the interest rate on credit cards and adjustable rate mortgages. A credit card's interest rate might fluctuate along with the prime rate listed in The Wall Street Journal. To determine the actual rate, lenders typically add a set number of percentage points to the index.
Initial Fraud Alert - A 90-day warning that cardholders can ask the credit bureaus to place on their credit reports. If you have one added to your credit report, it will tell creditors that you may have been a victim of identity theft (for example, your wallet is missing). Before they give you credit, they must use "reasonable policies and procedures" to verify your identity.
Inquiry - A look at your credit report by someone with a "permissible purpose." Lenders viewing your report in response to your requests for credit place hard inquiries on your report, which lower your credit score. When they look to decide whether to send you a card offer, it's called a soft inquiry and doesn't affect your score.
Installment Loan - A loan where a set number of regular payments are required over a specified term. Typically, the required payments are each for the same amount. Examples include fixed-rate mortgages and car loans.
Interest - A percent of the amount of money you borrow that the lender charges for your use of the money. Also called a finance charge.
Interest Rate - The specific amount of interest charged. For example, a credit card might have an interest rate of 16.99% per year. Also called Annual Percentage Rate (APR).
Introductory Rate - Also known as a teaser rate, this is the low amount of interest that lenders charge for a few months up to a year or more, in the hope of getting us to apply for and use their cards. Typically, an introductory rate applies to purchases or balance transfers, which then rises to a higher APR after the introductory time has elapsed.
Issuer - A bank or other lender that gives credit cards at varying interest rates and terms, based on its own definitions of creditworthiness and marketing strategies.
Joint Account - A credit card account shared by two (or more) people. Each person on the account is legally responsible for any debts that are incurred, and the account will show on each person's credit report.
Judgment - A court decision that determines how much money you have to pay to satisfy a debt or as a penalty. Judgments remain on your reports for at least seven years and will lower your credit score significantly.
Late Fee - A fee assessed when a cardholder does not pay on time. Late fees can be as high as $39, as of this writing.
Liability - Financial and legal debts that a borrower is responsible for repaying.
LIBOR - London Interbank Offered Rate. The interest rate banks are charged to borrow money from other banks in the London wholesale money market, which is usually lower than the prime interest rate used in the U.S. An index used for a few variable-rate credit cards issued in the U.S.
Merged Credit Report - A combined summary of a consumer's credit history from the three major credit bureaus, Equifax, Experian, and TransUnion.
Minimum Payment - The smallest payment amount a creditor will accept on a credit card account in order to prevent the account from going into default. Typically, the minimum payment on credit cards is about 2% of the amount you owe (your balance).
Monthly Periodic Rate - Monthly interest rate. Annual Percentage Rate (APR) divided by 12 (number of months in a year).
Non-dischargeable Debt - In bankruptcy, a debt that cannot be absolved.
Over-the-limit Fee - A fee assessed when cardholders charge more than the allowed credit limit. Over limit fees can be up to $39, as of this writing.
Penalty APR - Also known as default APR. The annual percentage rate charged if you default on the account, by making a late payment, exceeding your credit limit, having a bank not honor your payment, and so on.
Periodic Rate - The interest rate and how it relates to a period of time. The cost of debt per month is called the monthly periodic rate, and the cost of debt per day is called the daily periodic rate.
PIN - Personal identification number. A consumer-chosen, confidential code usually consisting of four to six digits that allows only the individual access to account information and use of a debit card at an ATM machine or with a merchant. Also, credit cards normally require PINs to withdraw cash from an ATM.
Preapproved - Indication that a consumer has passed the initial credit screening requirements. Credit card companies can still deny credit or offer credit with higher interest rates if an applicant's credit rating doesn't meet their requirements. An example is a preapproved credit card offer that you get in the mail.
Prime - The lowest interest rate banks charge their most creditworthy customers, usually corporations. The most common index used for variable-rate credit cards. Often, creditors use the prime rate as listed in The Wall Street Journal as the basis for their rates.
Purchase APR - The annual percentage rate charged when you carry a balance month-to-month on any goods and services bought with your card.
Rate - An amount expressed as a percentage that a consumer agrees to pay for borrowed money.
Rebate Credit Card - A credit card that rewards customers with cash, merchandise, gift cards, or other services based on the amount charged to the card.
Retroactive Interest - Additional interest that lenders "go back" and charge. Card issuers using the two-cycle billing method charge retroactive interest on unpaid balances over a two-month period. Also refers to the interest lenders are currently able to charge on already existing balances when they raise the rate, even though the debt was incurred at a lower rate.
Revolving Credit - A type of credit line that does not have a specific repayment schedule, but requires a monthly minimum payment that pays interest and usually some principal on the debt. Credit cards have revolving credit lines.