When you get your credit card statement, does the language look like Greek to you? Sometimes it's difficult to understand exactly what your credit card provider means because credit card companies often write in "legalese."
If reading your credit card agreement or statement makes your head hurt, don't worry. We've got you covered. Here are some plain English definitions to help you decipher common credit card terms and phrases.
Credit bureaus compile a mathematical summary of your credit report based on factors that reflect your creditworthiness. The resulting score, known as a credit score, tells lenders at a glance whether it's a good idea to lend you money or not. Credit scores are somewhere in the 350-800 range, where 350 is extremely poor, and 800 is outstanding.
Those with low credit scores have trouble getting loans and typically have to pay much higher interest rates than those with higher credit scores.
Credit bureaus use a combination of factors to determine your credit score. Factors include your available credit, your current debt, your payment history, length of credit, and mix of credit.
Your credit limit determines your available credit. It is the maximum amount of credit you can access through a credit card. If you go over your limit, your credit card company will charge penalty fees to your account.
To keep your credit score healthy, you should never use all of your available credit. Most credit bureaus prefer that you have a credit utilization ratio of no more than 30 percent, meaning that you use no more than 30 percent of your available credit line. For instance, if you have a credit limit of $1,000, you would use no more than $300 on your card.
Your credit history describes how responsible you were with debt in the past. It features details on how timely you were repaying your debts and what types of debts you have accrued.
The Annual Percentage Rate is the yearly interest you pay on your debt. You can avoid having to pay such interest by paying your monthly balance in full before the due date.
Your credit score determines the APR you get on your loans. The better the credit score, the lower your APR will be. The difference can be significant. For example, a good credit score may get you a 15 percent APR on a credit card. A bad score on the same card can mean a 25 percent APR.
The annual fee is a fee some credit card companies charge yearly for handling your account. Not all credit cards carry such fees, but those that offer rewards often do. Make sure you know whether your card is an annual fee-carrying one. If you opt for rewards, make sure you can generate enough value in rewards to exceed the annual fee. Otherwise, it might make more sense to choose a card with no rewards and no annual fee.
A balance transfer is just like it sounds. You transfer the balance you owe on one credit card to another credit card. Some people choose to do this because one credit card may have a higher APR than another or because one has annual fees and another may not.
Some credit cards offer introductory zero percent APR rates to encourage people to transfer balances from high-interest-rate cards. This strategy may sometimes make sense, but it is wise to read all the fine print before you choose this option. Most balance transfers come with initial balance transfer fees, which are usually around 3–5 percent of the total amount you transfer, typically with a minimum fee of $5-$10.
Then, after the introductory period is over, any balance you still have remaining on the new card is subject to the standard APR for the card, which is often not all that much better than the APR for the original card from which you transferred the balance in the beginning. So, before you choose this option, be sure to calculate the cost.
The due date is the date by which your payment to the credit card provider needs to be made. Remember that payments may take 1-2 business days to clear, so make your payments well in advance of your due date. If you are still mailing your payments in, remember to allow time for mail delivery as well.
If your payment settles late, you will incur significant late fees and the credit card provider may even raise your APR, which could be disastrous to your long-term financial success.
The grace period may seem like a friend for those who need credit card help, but it can be tricky. It is the period the creditor waits before applying interest following new credit card purchases. Typically, credit card providers do not charge interest for purchases made within a payment cycle if you pay your credit card bill in full each month and never carry a balance over from one month to the next.
However, credit card providers are under no obligation to offer grace periods and some do not so be sure to read your credit card agreement carefully. Do not simply assume that your card provider offers a grace period.
In almost every case, credit card providers offer no grace period for cash advances, which means that when you get a cash advance from your credit card, interest begins accruing immediately.
This is how much you have to pay each month to keep your credit card account in good standing. A flat rate of around $25 or one to two percent of your balance is the normal minimum that most credit card providers charge. Remember, though, that you will not avoid racking up interest if you only pay the minimum amount due. In fact, paying the minimum amount virtually ensures that you will stay in credit card debt for years to come.
The introductory rate is a special/promotional APR that creditors charge those who open a new credit card. Introductory rates are only valid for a predetermined period. Promotional APRs may be as low as zero percent. After the end of the promotional period, the APR goes up. Be careful when choosing a card based on the introductory rate alone, as this rate only lasts for a little while. It is wiser to choose a credit card based on the rate it will carry after the introductory period is over instead.
What to Do If Credit Card Debt Is Too Much to Handle
If your credit card debt has gotten out of control and you need some help to handle it, debt settlement may be a good debt relief option to consider. Unlike debt consolidation, debt counseling, or other forms of debt resolution, debt settlement can reduce the amount of principal you have to pay off.