The world of credit cards is filled with technical-sounding terms. You’ll come across them when you’re looking for a new credit card. You’ll see them in the terms and conditions of the cards you already have.
APR, EMV, variable interest… what does it all mean?
It’s important to understand these credit card terms — they impact how you can use your card, the costs you pay, who can use your card, and a host of other important issues.
So we put together this credit card term glossary. If you know these terms, you’ll understand exactly what you’re agreeing to as a cardholder — and exactly what costs you’ll incur when charging to your credit card.
Here are 10 of the most important credit card terms. You need to know them when choosing a card, reviewing your current card agreement, or figuring out how to best use your card.
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1. Annual percentage rate (APR)
Annual percentage rate is the total cost of borrowing on your card for a year, including both interest and fees. The higher the APR, the more it costs to borrow. For example, if you borrow $1,000 on a card with a 20% APR — and make no payments — at the end of one year you’ll owe $1,200.
With credit cards, you pay interest if you don’t pay your statement balance by the due date. When you do pay interest, it’s usually compounded daily. So the interest is added to your principal balance at the end of every day and you pay interest on that interest. This compounding interest can add up very quickly.
2. Authorized user
An authorized user is a person who can use your credit card account but isn’t legally responsible for charges they incur. You can add anyone as an authorized user, although some cards charge for authorized users or limit how many you can have.
Many parents make their children authorized users so they have a credit card for emergencies. The credit account shows up on authorized users’ credit reports, so being an authorized user can help build credit. But the primary cardholder is responsible for all charges incurred by the authorized user.
3. Average daily balance
Average daily balance is calculated by totaling the balance due on your card each day during a statement period and dividing that number by the total number of days in that period. Your average daily balance is used by some credit card issuers to calculate the amount of interest due on your credit card.
Here’s an example. Let’s say you charged nothing on your card during the first 29 days of a 30-day billing cycle. On the last day, you charge $10,000. Your average daily balance for the 30-day period would be $10,000 / 30 days = $333. This is the amount you’d be charged interest on. Your average daily balance is low because you’re factoring in 29 days of a $0 balance.
4. Balance transfer
A balance transfer transaction occurs when you transfer the balance of a credit card onto another card. With many credit cards, you pay a small fee to transfer a balance. Some cards also offer a promotional 0% intro APR for balance transfers for a limited time.
Transferring a balance may reduce the interest you pay on the transferred debt. But be aware: you’ll pay interest at the full rate once the 0% promotional APR expires.
5. Cash advance
A cash advance is when you get cash from your credit card issuer instead of making a purchase. Some cards let you get cash from an ATM or bank teller. With others, you need to use cash advance checks you deposit into a bank account.
There’s often a fee for a cash advance, as well as a different, higher APR for cash advances.
6. EMV chip
EMV stands for Europay, Mastercard, and Visa. These companies agreed on security standards for a computerized chip implanted in some credit cards. The chip creates a unique one-time-use transaction code every time your card is used.
Cards with an EMV chip are more secure than cards with a magnetic strip. At the end of 2018, 60% of cards in the US had an EMV chip (while most of the rest of the world had over 80%).
7. Finance charge
A finance charge is the fee charged by your card issuer for using credit. It’s determined by your APR and any other fees assessed by your issuer. Finance charges apply to credit card balances not paid in full by the end of the grace period each billing cycle.
Some cards have special 0% promotional rates for a certain time period, such as 12 months from account opening. If you have a 0% promotional APR in effect, you won’t pay a finance charge until the promotional period ends.
8. Grace period
A grace period is the time between the end of your billing cycle and the payment due date. If you repay your purchases in full during the grace period, you won’t be charged interest on the purchases made during that billing cycle.
9. Prime rate
The prime rate is the base rate at which money can be borrowed commercially. Many credit cards base their interest rate on the prime rate. The prime rate generally changes as the federal funds rate changes. The Federal Reserve sets the federal funds rate.
If your credit card interest is based on the prime rate, your interest rate could go up and down as the federal funds rate and prime rate change.
10. Variable interest rate
Variable interest rates change over time, so you can’t always predict what they’ll be. Credit cards typically charge a variable interest rate.
For many cards with variable rates, the rate is set based on the prime rate. Other cards use different benchmarks or tie their interest rate to a different financial metric than the prime rate.
Make sure you know these key credit card terms
The definitions of these credit card terms help you better understand what you pay to borrow money on a credit card. They can also help you determine the cost of borrowing if you open a new account. Dig into the terms and conditions of every card before you start borrowing.
Make informed choices about how to use your card based on those terms and conditions. And bookmark this page so you can come back to it when you find a new term you’re not familiar with!
View more information: https://www.fool.com/the-ascent/credit-cards/articles/10-credit-card-words-you-should-understand/