Credit card terms 101

When it comes to your credit card, how well do you know your account’s terms and conditions? What happens if you miss a payment? How is your minimum payment calculated? Are you making the most of your card’s rewards?

Understanding these and other key credit card terms and concepts can help you better manage your account and know what you need to do to build or maintain your credit scores.

Key takeaways

• Learning common credit card terminology can help you build your basic understanding of how your credit cards work.
• Being aware of your card’s annual percentage rate (APR) and potential fees can help you understand the costs of using a credit card and how to avoid unnecessary charges.
• Understanding how to earn and redeem rewards, such as cash back and travel miles, can help you get the most out of your card.

To get a clearer understanding of how using a credit card could affect you, it can help to start by familiarizing yourself with these common terms:

Credit scores are numerical estimates of your creditworthiness, or how likely you are to repay what you borrow. Scores are based on factors that include:

• Payment history: How well you’ve handled your bills in the past
• Credit utilization ratio: How much of your available credit you’re using
• Credit age: How long your credit accounts have been open
• Credit mix: How your debt varies between installment loans and revolving credit
• New credit applications: How recently you’ve applied for new loans or lines of credit

FICO® and VantageScore® are two common credit-scoring companies. They each have multiple scoring models that can be used to calculate scores, which means people often have more than one credit score. But both companies’ most popular scores range from 300 to 850.

The information used to calculate your credit scores can be found in your credit report.

A credit report is a document that contains your:

• Personal information, such as your name, Social Security number and birth date
• Credit history, which records how you’ve handled your credit accounts
• Public records, including any bankruptcies, foreclosures and liens
• Hard and soft inquiries into your credit file

Credit card issuers, lenders and other companies can use your credit reports to determine whether to approve you for a credit card, loan, insurance policy, apartment and more.

The three major credit bureaus are Equifax®, Experian® and TransUnion®. They collect your credit information from a wide range of sources and create your credit reports.

A credit limit is the maximum amount your credit card issuer typically allows you to charge on your credit card. In general, it’s best to stay well below your credit limit to help keep your credit utilization down. Using less than 30% of your total available credit across all your accounts may help your credit scores over time. 

Anytime you use your credit card, it adds to your credit card balance, or the current amount of money you owe your lender. That’s known as your current balance. The exact amount you owe each month is based on how much you spend during a billing cycle. It’s known as your statement balance. Both balances might include interest charges and fees.

A billing cycle, or billing period or statement period, is the time between your credit card statements. It’s usually about 30 days long. Your transactions during your billing cycle, plus any outstanding balance from previous cycles, make up your credit card statement, which will typically be due a few weeks later. The amount you owe at the end of each billing cycle also determines the minimum required payment on your billing statement.

The minimum payment is the smallest amount you can pay by your statement due date and still meet the terms of your card agreement. Paying at least the minimum each month is one way to avoid late fees and other penalties. Paying more than your statement balance each month is one way to reduce or avoid interest charges.

The time between the end of your billing cycle and your credit card statement due date is known as a grace period. It can help you avoid interest charges if you pay your balance in full on or before your bill’s due date. But a grace period isn’t an extension of your payment due date.

A balance transfer is when you move credit card debt from one card to another. If a balance transfer credit card offers a temporary promotional interest rate, that may allow you to save money on interest charges. However, there might be a balance transfer fee, and opening a new credit card account can temporarily affect your credit scores. It’s also worth noting that you can’t typically transfer balances between two cards from the same issuer.

Cash advances allow you to borrow money against your existing credit lines. But cash advances can charge other fees and have higher interest rates than standard credit card purchases do. If you need a cash advance, you may be able to use special checks or an ATM to make a withdrawal.

If you carry a balance on your card, it’s important to know how that balance might cost you. Here are some of the most common finance and interest charges:

In this commonly used method for calculating finance charges, your issuer may track your balance each day, adding charges and subtracting payments as they occur. At the end of the billing period, the resulting daily balances are added together. Then the total is divided by the number of days in the billing period to get the average daily balance.

To figure out the adjusted balance, your issuer may subtract payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the current billing period aren’t included in the adjusted balance. This method gives you until the end of the billing period to pay your balance and avoid the interest charges.

APR is the finance charge or interest rate you pay on purchases when you carry a balance on your credit card. It’s calculated as a yearly rate, so if you want to know what percentage you would pay each month in interest, divide the APR by 12 months. For example, if you have an APR of 24%, the monthly finance charge would be 2%.

Most credit cards have a variable APR, which means it’s tied to an index, such as the prime rate. APR can change based on the type of transaction, like higher rates for cash advances or promotional APRs for balance transfers or new accounts.

A promotional rate is a temporary interest rate that’s lower for a designated period of time. If it’s tied to a new account, it might be referred to as an introductory rate. A promotional rate may give you the opportunity to pay down debt faster or make larger purchases with smaller interest payments during the promotional period. But make sure you find out what the standard rate will become once the promotional rate expires because it will apply to any new or existing revolving balances.

You’ll probably have some fees associated with your credit card. The most common credit card fees include:

You can think of annual fees like membership dues. If your card has an annual fee, your issuer may bill your account. Not all cards have an annual fee. If you have a card that does, taking full advantage of perks and rewards could offset the cost.

When you transfer an existing balance from one credit card to another, there may be a fee. It’s calculated either as a percentage of that balance being transferred or as a set amount.

Some issuers charge cash advance fees, either as a percentage of the advance or as a set amount.

Traveling abroad? Check to see if any purchases you make outside the U.S. come with this fee, also referred to as a foreign transaction fee. Capital One doesn’t charge this fee. View important rates and disclosures.

Missing a payment due date may result in a late fee.

If you exceed your credit limit, some issuers might charge a fee. But Capital One doesn’t. View important rates and disclosures. And many Capital One cardholders may be able to exceed their credit limits. If your account has access, you can use the Confirm Purchasing Power tool to check if an over-limit purchase may be approved. You can also disable the ability to spend over your credit limit in your over-limit preferences.

If you pay your bill with a check that bounces, your card issuer may charge you a returned payment fee.

Rewards cards let you earn cash back, miles or points when you use your card. If you’re comparing rewards cards, it can be helpful to look for rewards that are flexible, easily earned and easily redeemed.

Knowing some common credit card terms can help you better understand your credit card. And when it comes to comparing cards, learning key credit card terms can help you decide what best fits your needs and budget.

If you’re in the market for a new card, you can compare credit cards from Capital One and see if you’re pre-approved without hurting your credit scores.