Confused by Credit Terms?

Have you ever tried to read those little “Terms & Conditions” updates you get in the mail every so often?  Or worse, have you ever tried to make any sense of the various ways that your credit card interest is calculated?  Maybe you’ve never had a credit card before and you’re confused by different things on your first statement?

While all of those different sections, boxes, and percentages may be a bit confusing at first, here’s a quick guide to what they are and, more importantly, what they mean for you:

  • Balance:  The balance on your credit card is the total amount that you on on the card at the time the statement was issued.  This balance includes any purchases that you have made before the statement closing date, less any payments you’ve made, and plus any interest charged on the account for the previous month.
  • Interest:  Interest is the amount that your credit card provider charges you for carrying a balance on the card each month.  The amount of interest charged depends on the APR (annual percentage rate) that is attached to the card.  This APR is determined based on factors in your credit report – the better your credit score, the lower the APR you will likely be charged when you apply for a new credit card.
  • Minimum Payment:  The minimum payment is the lowest payment that you can make on the card to keep your account current and in good standing.  Typically, the minimum payment is a percentage (2-4%) of the total balance due, or a set amount (like $25.00), whichever is greater.  It’s important to remember that paying only the minimum payment on your credit cards will cost more money in the long run, so even if you get something on sale, you’ll likely pay a lot more for the item over time if you only make the minimum payment.  (The amount of time that it will take to pay the card off if you make only the minimum payment is shown in a special section on your statements.  Take a look at this section and pay close attention – sometimes it can take years to pay off a balance!)
  • Grace Period:  The grace period is the amount of time that you have after you’ve bought something with the card to pay the balance in full without incurring any interest charges.  Federal law requires this grace period to be at least 21 days, however, some credit card providers will allow up to 45 days, depending on your credit terms.
  • Payment Due Date:  This is the date that you must make a payment on your credit card to keep your account in good standing.  Failure to make your payments by the due date can result in late fees or suspension of your credit privileges with your credit card provider, so it is important to make your payments on time, every time.  If you make payments by mail, allow seven to ten days when you mail your payment to ensure that it arrives on time.  If you make your payments online, don’t wait until the last minute – you run the risk of the payment not posting in time, or worse, their website may be down for maintenance, etc., and your payment could end up being late.
  • Annual Fee:  Some credit card providers charge you an annual, monthly, or other fee just to carry their credit card.  These fees are typically charged whether you carry a balance on the card or not and, if you aren’t careful, can even push the balance of your account over the credit limit.  These fees are sometimes offset by benefits that come with the card, however, pay close attention to the amount it will cost you to have the card when you apply, as it may not be worth the additional cost.

Of course, these simple explanations don’t cover all of the terms, conditions, and other information that comes along with your credit card accounts, but if you know the basics, you’re off to a good start.  Always, always pay attention to the terms and conditions of any account before you apply AND study those monthly statements that you get in the mail or via email to make sure that everything is as it should be.