When looking for a credit card it is important to understand the various terms related to credit cards. Below are some of the most common terms you will come across when searching for a credit card. By understanding these terms you can better compare credit card offers and determine which is the better offer.
Annual Fee Many banks or card issuers may charge a annual membership fee for their credit cards. The fee may range from $25 to over a $100 depending on the card. There are also many cards out there that no have no annual fee!
Annual Percentage Rate Often referred as the "APR", this shows how much credit will cost you on a yearly basis. The lower the rate the less you will pay on interest charges. There are two types of APR:
1. Variable APR A variable annual percentage rate allows credit card issuers to change your APR based on fluctuations in indexes such as the prime rate.
2. Fixed APR A fixed annual percentage rate is not subject to adjustment based on indexes like the variable rate. But beware that credit card issuers reserve the right to change the your rate at anytime.
Average Daily Balance Method This is the most common method that credit card companies use to calculate your payment. An average daily balance is determined by adding each day's balance and then dividing that total by the number of days in the billing cycle.
Billing Cycle The number of days between the previous statement date and the current statement date. The billing cycle is typically between 27 to 33 days long.
Credit Line This is the most you can charge on your account. Under some conditions, your card issuer may increase or decrease your credit line.
Finance Charges The total charge for using a credit card consisting of interest charges, late fees, transaction fees and other charges.
Grace Period Many credit card companies offer a grace period where no interest is charged. The typical grace period is usually between 20 and 30 days. However, if there is no grace period, finance charges will accumulate the moment a purchase is made with the credit card.
Introductory APR Also known as a teaser rate, many credit card companies will offer a low interest rate for an initial period of time to encourage consumers to accept their credit card offer. After the initial period the rate will change to the stated interest rate.
Periodic Rate This is the interest rate described in relation to a particular amount of time. For example, the daily periodic rate is the cost of credit per day.