Credit Terms - Iowa College Access Network - ICAN

Credit Terms

It helps to know what all the words mean when you're reading the fine print. These terms are often used in credit card agreements, loan applications and other credit situations. Make sure you understand how they apply to you.

Annual fee. A fee you pay every year to the credit card company. Not all credit cards have an annual fee.

Annual Percentage Rate (APR). The cost of credit expressed as an annual, or yearly, rate. It includes interest and other fees associated with the loan or card, such as an origination fee.

Balance. The amount currently on the credit card or loan. If you started the month with $150 to pay on your credit card and charged another $50 without making a payment, your balance is now $200 (plus interest).

Balance transfer. Moving your balance from one credit card to another or from one lender to another. This is sometimes done to get better rates or conditions. (Be careful, some companies charge fees to transfer balances; you may get charged from both accounts. Too many open accounts can also damage your credit.)

Credit history. A report that shows how well you pay your bills and how much debt you have. Unpaid credit card and loan balances show up here, and credit card issuers (as well as employers, banks, loan companies, landlords and others) use this information to decide whether you're a good person to extend credit to. It can also be the difference between a high interest rate and a low one.

Credit limit. The highest amount you can carry on your credit card. If you go over your limit, charges will probably apply. You may find that you can charge well over your limit, but the company will charge you high over-the-limit fees.

Credit score. A number used by lenders to understand how likely you are to pay your bills on time. Your credit score depends on your total credit limit, number of credit cards and other loans, how much you owe on each, and how often you pay on time.

Default. A situation where you don't make the minimum monthly payments and the company can begin the collections process. (Which is bad, very bad.)

Finance charge. The cost of credit expressed in dollars. This is the amount you will pay to use the loan or card. It includes interest and fees that may be associated with the loan, such as an origination fee. The finance charge is the APR shown in dollars instead of a percentage.

Fixed interest rate. An interest rate that stays the same as long as you hold the loan or credit card.

Grace period (credit cards). A set amount of time, usually 15 to 30 days, when you can pay off your balance without having any finance charges tacked on.

Grace period (loans). A set amount of time agreed upon by you and the lender when you don't need to make payments. A lender may give you a grace period for six months after graduation on a student loan, for example.

Introductory rate. The low interest rate that convinces you a credit card or loan is a good deal. Offered for a limited time, this rate later changes to a higher variable or fixed rate. You need to know how long the introductory rate applies, and what the new rate will be.

Minimum payment. The smallest amount you can pay each month to keep your account from default. This may be either a small percentage of the balance or a set amount like $10, whichever is higher.

Principal. The amount of money you owe before any interest is added on. Your balance is the sum of any previous months' principal plus interest.

Transaction fees and other charges. Other costs to use the card or the loan. These may be charged for cash advances or exceeding the credit limit on a credit card, or you may pay them to obtain a loan or transfer balances.

Variable interest rate. A rate that may change during the life of the loan or while you hold the credit card. Variable interest rates usually have a cap, or maximum, they cannot go above.

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