Credit Card Terminology: Essential Terms and Definitions

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Annual Fee

An annual fee is a yearly charge imposed on cardholders for the privilege of having and using a particular credit card. It usually helps the credit card issuer cover the cost of maintaining a credit card account and delivering credit card benefits. Many credit cards do not have an annual fee and those who do often waive it for the first year.

Annual Percentage Rate (APR)

The annual percentage rate (APR) is the interest rate charged on credit card balances. APR is typically calculated on a daily or monthly basis and expressed in an annualized form. It varies widely depending on such factors as the creditworthiness of the cardholder, the type of credit card, and the card issuer’s terms and conditions.

Different APRs can apply to purchase transactions (Purchase APR), balance transfers (Balance Transfer APR), and cash advances (Cash Advance APR). The APR for Cash Advances is usually significantly higher than the Purchase APR. APRs are listed in the credit card agreement and on monthly billing statements.

Credit card interest charges are assessed monthly if the previous statement balance is not paid in full each billing cycle. The interest charges are collected on the unpaid portion of the statement balance and not the entire amount of the statement balance.

Balance

A balance is the total outstanding debt on your credit card account at any point in time, including incurred interest and other charges. Your credit card statement typically provides details about your last billing cycle balance, also known as the statement balance.

Balance Transfer

A balance transfer is the process of moving all or part of the balance from one credit card to another. It is usually done to save money on interest and take advantage of a lower APR or 0% promotional offer from another bank or lender. A balance transfer you initiate will typically be charged a balance transfer fee which currently varies between 3-5% of the amount you transfer.

Balance Transfer APR

The balance transfer APR is the annual interest rate charged on a balance that is transferred from one credit card to another. Many credit cards offer an introductory balance transfer APR as low as 0% for a set period of time ranging from 6 to 21 months or more.

Balance Transfer Fee

When you transfer a balance from one credit card to another, you will often incur a balance transfer fee typically 3% to 5% of the transferred amount.

Billing Cycle

A billing cycle is the period of time between two consecutive credit card account statements, i.e., the closing of one credit card statement and the closing of the next. It varies between 21 and 30 days but usually is close to one month. During the billing cycle, your credit card lender records and processes purchases, cash advances, and balance transfers, as well as calculates interest charges, and produces monthly billing statements.

Cash Advance

When you use your credit card to withdraw cash at an ATM, through a special check or another cash-like transactions, you essentially borrow money against your credit card account, and this is known as a cash advance. Cash advances typically have a one-time fee between 3% to 5% of the total amount of the cash advance amount. Additionally, cash advances are subject to a higher interest rate than your standard purchase APR.

Cash Advance APR

The cash advance APR is the annual interest rate charged on credit card cash advances. It is often the highest APR and does come with a grace period. This is because cash advances are considered to be a riskier type of loan.

Cash Advance Fee

A cash advance fee is a fee that is charged to your credit card account once when you take out the cash advance. It is usually a flat fee (minimum $10) or a percentage of the transaction (3-5%), whichever is greater.

Credit Bureau

A credit bureau is an organization that collects credit information on individual consumers, e.g., the number of credit accounts open, payment history, and credit limits, analyzes it, and produces consumer credit reports. Credit bureaus provide credit reports about potential customers to lenders to help them decide if they will loan money to someone and what APR they will offer. Lenders regularly report credit information about their customers to credit bureaus. The three major credit bureaus are Equifax, Experian, and TransUnion.

Credit Card

A credit card is a payment card issued to a customer by a creditor or bank to use for daily purchases of services and goods, cash advances, and balance transfers. It represents a credit account with an established line of credit. Credit cards offer several benefits, including convenience, unique features like reward programs, customer protection, and the ability to build a credit history.

Cash Equivalent Transactions

A purchase of items that can be used as or changed into cash is known as a cash equivalent transaction. Examples of cash-like transactions include money orders, wire transfers, foreign currency, travelers checks, casino gaming chips, lottery tickets, and others.

Credit History

A credit history is a record of your current credit situation and how you managed your debts in the past. In particular, it concerns your payment history - whether or not you have missed payments, debt in collection, bankruptcies, or other financial missteps. Credit history also includes your current balances, number of loans, types of credit accounts, dates when you opened and closed them, number of hard credit inquiries and others information. Typically, credit history is summed up in a single metric, known as a credit score, which reflects the borrower’s creditworthiness and financial habits.

Good credit history includes paying your credit bills on time, keeping your debt balances relative to the total available debt low, and having fewer hard inquiries.

The presence of late or missed payments and a large number of hard inquiries are all indications of not-so-good credit history. More severe financial setbacks such as debt in collection, repossessions, foreclosures, and bankruptcies are considered alarming signs and produce a lasting damaging effect on your credit history.

Credit Limit

A credit limit is the maximum amount of money that can be charged on a credit card. The credit limit is set by the card issuer and depends on such factors as your payment history, credit report, number of other loans, debt-to-income ratio, and others.

Usually, you have the option to request a credit limit increase: by contacting your lender or submitting a request through the mobile app. Upon your request, the lender sometimes performs a hard pull which will be reflected in your credit history. Even if not approved, the hard pull will likely decrease your credit score.

Credit Report

A credit report is a statement that provides details of your credit history, current credit situation, and past credit activity. Lenders use information from credit reports to make credit decisions and decide on what interest rates they can offer you.

Credit reports contain personal information such as your name, address, date of birth, social security number, etc. They also include credit information like the number of credit accounts, credit limits on each account, account statement balances as well as when they opened and closed. Public records such as tax liens, bankruptcies, and foreclosures also enter into the credit report. At last, soft and hard inquiries also appear on your credit report.

Credit reports are commonly used for calculating a credit score, which reflects customers’ creditworthiness.

Credit Score

A credit score is a three-digit number aggregating information from your credit report into a single metric. It typically ranges from 300 to 850 and reflects your creditworthiness. Different scoring models are used to compute your credit score. The two most important ones are FICO® and VantageScore®. To make their credit decisions, most lenders rely on one of these two credit scores. Generally, the higher your credit score, the more likely you will be approved for a credit card or loan and offered better lending terms. Your credit score is not a fixed metric and changes whenever your credit history is updated.

You can read more about credit scores and why they are important in our special article.

Fixed APR

A fixed APR is a yearly interest rate that does not change over the lifetime of your credit card balance. Fixed rates are typically higher than alternative variable rates. Yet fixed APR remains the same regardless of the changes in financial market conditions, such as growing inflation expectations or increases in the U.S. prime rate.

Foreign Transaction

A foreign transaction is a purchase, cash advance, or other cash-like transaction in a currency other than the currency of your credit card. For every foreign transaction, a credit card issuer typically charges a foreign transaction fee. Foreign transactions naturally occur when you pay with your credit card while traveling abroad, but they also may happen when you shop online on internet websites based outside of the U.S.

Foreign Transaction Fee

A foreign transaction fee is assessed by a credit card issuer on a credit card account for every foreign transaction. Foreign transaction fees typically range between 1% and 4%. Some banks offer credit cards that do not charge foreign transaction fees.

Grace Period

A grace period is a time during which interest on the previous billing cycle purchases is not assessed. It is the time between the end of your billing cycle and the date your bill is due. If you pay your balance in full before the payment due date, you will not be charged any interest on your last billing cycle purchases. If a credit card issuer offers a grace period, it must last at least 21 days, as mandated by the Card Act of 2009.

Hard Inquiry

A hard inquiry, or a hard pull, is a type of credit report check that occurs when you apply for a credit card or loan. Typically, the lender makes a lending decision after it requests and reviews your credit report from a credit bureau. Once you apply, a hard inquiry record is triggered in your credit history in one or more credit card bureaus. A hard inquiry can lower your credit scores and stays in your credit history for up to 2 years.

Introductory APR

An introductory APR is a promotional interest rate for a set period of time that is lower than the card’s standard APR. When the introductory period ends, the standard APR will be applied. To attract new customers and promote new credit cards, banks frequently offer a 0% introductory APR for a period of time between 6 and 21 months or more.

Late Payment

Payment can be considered a late payment if it is received after 5 p.m. on the due date (in the timezone where payments are to be received). Usually, the payment date will be moved to the next business day if the due date falls on a bank holiday or a Sunday. When you pay your bill late, the lender reserves the right to charge you a late payment fee as a violation penalty. Typically, a payment is not reported to a credit bureau if it is made within 30 days after the due date.

Late Payment Fee

Your lender may charge you a late fee for each missed payment on your credit card. The late payment fee can vary depending on the credit card company, but according to CFPB, issuers currently charge late fees as high as $41. Remember, if you miss a payment bill two or more times, your lender may impose a penalty APR on your card, which is typically much higher than the standard APT.

Minimum Monthly Payment

A minimum monthly payment is the minimum amount a cardmember needs to pay each billing cycle to keep a credit card account current. It is also known as minium payment due and can be found in the billing statement issued at the end of the billing cycle. Paying the minimum monthly payment before the due date will keep your account in good standing and help you avoid possible late payment charges and penalty APR.

Payment Due Date

A payment due date is provided on your credit card statement at the end of each billing cycle. To keep your account in good standing and avoid late payment fees, you must make at least a minimum payment by the payment due date.

Penalty APR

A penalty APR is an interest rate applied to your credit card account if you have two missed payments (missed payments are considered violations of the credit card agreement). Penalty APR is typically much higher than the standard APR on your card. Penalty APR lasts for at least 6 months but can be longer if you continue to violate the terms of your credit card agreement.

Prime Rate (U.S. Prime rate)

The prime rate is a financial index serving as a basis for the general interest rate levels used in the U.S. economy and financial markets. It is often used to calculate the variable APRs. The prime rate is closely linked to the federal funds rate set by the Federal Reserve during the Federal Open Market Committee (FOMC) meetings. When the federal funds rate goes up or down, the U.S. prime rate increases and decreases correspondingly.

Purchase APR

A purchase APR is an annual interest rate applied to purchases of goods and services you make using your credit card. Purchase APR charges start accumulating after the grace period ends. If you do not make a minimum monthly payment by the due date or miss the payment, the introductory APR will likely be raised, and higher interest rates will apply.

Standard APR

A standard APR is an annual interest rate charged on the credit card balance after an introductory APR is over. The standard APR may vary substantially depending on the credit card type, the lender, and the borrower’s creditworthiness. If you pay your balance in full by the payment due date, you can avoid any interest charges altogether.

Statement

A credit card billing statement is a document that the credit card issuer generates at the end of each billing cycle. The lender sends the billing statement either by mail or electronically to your online account. The statement contains your new statement balance and your account activity, such as purchases, cash advances, and balance transfers; it itemizes your fees, interest, and payments and provides their calculations. It also indicates the minimum payment amount due and the payment due date. Often lenders also include some key account terms and their descriptions.

Statement Balance

A statement balance is the account balance at the end of each billing cycle. It includes purchases, cash advances, or balance transfers you have made using your credit card in the last cycle, as well as various applicable fees, such as accrued interest charges, late payment fees, annual fees, foreign transaction fees, etc.

Soft Inquiry

A soft inquiry is a type of credit report check that does not impact a borrower’s credit score. It is also known as a soft credit check or soft credit pull. Typically, a soft inquiry is performed to generally review your credit report and evaluate your potential creditworthiness. Soft inquiries are not used for making lending decisions. Most often, credit card issuers conduct soft inquiries to check if you could be pre-approved for a credit card offer. Checking your own credit report is considered a soft inquiry.

Variable APR

A variable APR is an interest rate that varies with changing financial market conditions. The variable APR is tied to an index rate, such as the U.S. prime rate. The variable APR increases or decreases as the prime rate changes up or down. To calculate the variable APRs, banks typically add a certain margin to the U.S. prime rate.