App version: 0.1.0

Credit Card Terms Explained

Editor’s note: At Lantern, we strive to help you make financial decisions with confidence. To do this, we occasionally feature content that includes information about our partners and their products or services. We do not provide, endorse, or guarantee any third-party product, service, information or recommendations—and our opinions are our own.
Rebecca Lake

Rebecca Lake

Updated May 20, 2021
Share this article:
Your Guide to Understanding Business Lines of Credit
A credit card can be a useful tool for spending, and some even make it possible for you to earn rewards on purchases. But before you start swiping the plastic, it's important to understand some basic credit card terminology. There are certain credit card terms that it’s good to know when you’re using and managing credit. The knowledge can come in handy whether you’re reviewing your credit card statement or looking at your credit card agreement when you’re opening a new account.  But if you're not a credit card expert, don't panic. You can easily expand your credit card vocabulary just by getting to know these key terms. 

Annual Fee

A credit card annual fee is a fee you pay yearly to the credit card company. Some credit cards have no annual fee, while others may waive the annual fee for the first year, but then charge you in following years.

Annual Percentage Rate

Annual Percentage Rate (APR) is one of the most important credit card terms to know. A credit card’s APR reflects the interest rate and fees as calculated on an annualized basis.  You can use APR to compare the cost of using one credit card versus another. For example, if Card A has a 23.99% APR while Card B has a 17.99% APR, Card B is going to cost you less money in interest if you carry a balance month to month. When you open a new credit card, the credit card company must disclose the APR in your cardmember agreement. You'll also see it reflected on your monthly statement. Remember, if you feel your APR is high, the simplest way to avoid interest charges is to pay your credit card balance in full each month. It’s worth noting, too, that credit cards can have more than one APR. For example, your cardmember agreement might mention the following:
  • Purchase APR. This is the regular variable APR that applies to purchases that you make with the card.
  • Balance transfer APR. This is the APR you'll pay for any balance transfers you make.
  • Cash advance APR. This APR applies to cash advances you take out.
Your cardmember agreement may also mention a penalty APR. This is a higher APR that can apply if you pay your bill late. A penalty APR may remain in place for a minimum of six months after it's applied. 

Authorized User

An authorized user is someone who has purchasing privileges on someone else's credit card account. For instance, if you have a teenager going to college, you might make your student an authorized user on one of your credit cards. An authorized user can use someone's credit card to make purchases and the account history will show up on the authorized user’s credit report. But an authorized user isn’t liable for any charges made with the card. (That’s in contrast to a joint credit card, for example, where the responsibility for charges is shared between both cardholders.) 

Balance

This is one of the simplest credit card terms. Your balance is just the amount of money you owe on your card at any given time. It includes purchases, balance transfers, cash advances, finance charges, and fees. 

Balance Transfer

A balance transfer allows you to move money you owe from one credit card to another. Credit card companies may offer a low introductory APR for moving debt from another card to theirs. But a balance transfer fee may apply to these transactions. This fee can be a flat dollar amount or a percentage of the amount transferred and it's added on to the card's balance at the time the transfer is completed. 

Billing Cycle

Your credit card billing cycle is the interval between the dates of the regular periodic statements you receive from your credit card company detailing your credit card activity and how much you owe. These intervals must be approximately equal and no longer than a quarter of a year. More typically, however, billing cycles are monthly.

Cash Advance

A credit card cash advance is a type of short-term loan you take against your credit line. For example, you may have a $5,000 credit limit from which you could withdraw $1,500 in cash at an ATM or by using a cash advance check. Much like balance transfers, credit card cash advances typically carry a fee. The APR for cash advances may be higher than the one charged on purchases, and interest begins accruing on cash advance balances right away. 

Credit Limit

Your credit limit, also known as credit line or spending limit, represents the maximum amount you can charge to your card. Some credit card companies may bill you for an overlimit fee if you exceed your credit limit. 

Foreign Transaction Fee

Foreign transaction fees can apply when you make purchases outside the U.S. Typically, credit card foreign transaction fees are between 1% and 3% of the purchase amount, though not all credit cards charge them. 

Grace Period

A credit card grace period is the time period between the end of a billing cycle and the date that bill is due. If you pay the balance in full during the grace period, no interest charges will accrue. 

Introductory APR

In addition to purchase, balance transfer, and cash advance APRs, it's also important to include introductory APR in your credit card glossary. An introductory APR is a promotional rate that's typically lower than the regular purchase or balance transfer APR. For example, you might come across a card that allows you to pay 0% on purchases or balance transfers for the first 15 months you have the card. Introductory APRs can save you money, with one caveat. To avoid interest charges, you must pay off any balances before the regular variable APR for purchases or balance transfers kicks in. 

Late Fee

Credit card companies can charge a late fee if you miss your payment due date. Though different cards may charge different amounts, the maximum late fee averages around $36. 

Minimum Payment

One of the key credit card terms to know is the minimum payment due. This is the minimum amount of money you're required to pay each month under your cardmember agreement. Credit card minimum payments may be a flat dollar amount or calculated based on a percentage of your balance. For example, if you have a $5,000 balance and your card issuer charges a minimum payment of 4%, your minimum due would be $200.  

Prime Rate

The Prime Rate represents the lowest interest rate banks charge to their most creditworthy customers. Credit card companies can set purchase, balance transfer, and cash advance APRs based on the Prime Rate. That means that if your card has a variable APR, your rate can go up or down in tandem with movements in the Prime Rate. 

Unauthorized Use

Unauthorized use is one of the credit card terms you may come across when reading the fine print on your cardmember agreement. It generally refers to any charges or activity on your card that you didn't authorize, such as purchases or cash advances. Federal law limits your liability for unauthorized use to $50. But many credit card companies offer a $0 liability guarantee if your card is used without your permission.

The Takeaway

These are some of the most important credit card terms to know. Understanding them can help you manage your credit better. And while using a credit card responsibly may in turn help you add even more terms to your credit card vocabulary, even more importantly, it may also help you improve your credit health.Finally, understanding these terms better may help you when you’re evaluating cards you might want to sign up for. Lantern’s Credit Card Preview tool can make it even easier to find options that could work well for you.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC21018

About the Author

Rebecca Lake

Rebecca Lake

Rebecca Lake is a freelance writer specializing in personal finance, investing and small business. Her work has appeared online at U.S. News and World Report, Forbes Advisor, CreditCards.com and Investopedia. Rebecca writes about a variety of topics for SoFi, including budgeting, saving money and student loans.
Share this article: