Do you often find yourself feeling as though you are trying to muddle through a foreign language when you are dealing with documents and information relating to your credit reports or agencies that offer various financial instruments or credit extensions?
Below is a list of several words or phrases used in the credit industry that are part of the common dialogue when dealing with credit agencies, whether they are reporting agencies or institutions that offer credit or funding to individuals.
Common Credit Terms Deciphered
Annual Fee – This is a fee, charged yearly, for the privilege of possessing a credit card.
APR (Annual Percentage Rate) – The overall interest rate, calculated yearly, that comprises a percentage of your outstanding balance.
Authorized User – Because businesses are supposed to verify your identity when you make a purchase with a debit or credit card (or make transactions with a bank account), the account holder is the only person permitted to use the card/account. An authorized user is granted permission to use the card/account, but transactions they conduct are not reported on their credit history.
Balance Transfer – Some credit cards will allow you to transfer balances from current cards, and will provide you with an introductory APR (for being a new customer) on the transferred amounts that is lower than your existing APR(s).
Cash Advance – When you conduct certain transactions with a credit card, like making a withdrawal from an ATM, the issuing company will typically charge a much higher interest rate against the advanced amount and also often charge a fee.
Charge Off – When the original credit issuer closes your account, writes it off as a loss, and sells the outstanding balance to a collection agency or third-party financial institution, this is called a charge off. This has a substantial negative impact on your credit.
Fixed Rate APR – A fixed-rate APR is a flat percentage rate calculated annually and applied to your account balance. The counterpart to this is a Variable Rate APR.
Grace Period – The grace period is the amount of time you are given between the time you make a purchase on credit and the time the interest rate begins accumulating on your account balance. If you pay off the total balance before the expiration of the grace period, you do not have to pay any interest on the total. Grace periods do not apply to the existing balance, but to new purchases only.
Late Payment Fee – When you fail to make your minimum payment each month by the designated due date, the credit issuer can assess a fee (generally between $10 and $35) that is added to your balance as a penalty for paying late.
Minimum Payment – This is the lowest acceptable amount you can pay on a monthly basis toward your outstanding balance to keep the account from being considered delinquent. Minimum payments often only cover the principal and do not pay toward interest. These can be a flat-rate payment or an amount based on a percentage of the total balance owed.
Penalty APR – If you make late payments, have your account in delinquent status, or exceed your credit limit, the credit issuer can apply a penalty APR to your future purchases which is typically much higher than the standard APR on your account.
Variable Rate APR – Unlike a Fixed Rate APR, which does not change, a variable rate APR fluctuates based upon the interest rates charged to banks and financial institutions by the government.
Knowing what these terms mean can help you decipher credit offers and determine which ones are truly beneficial or which ones have potential charges, fees, penalties, or consequences that do not make the offer as advantageous as it may initially appear to be.