Top 10 Credit Card Terms You Should Know Before Applying For A New Credit Card

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The credit card application process is never really easy for anyone. There are many terms and conditions in the process that might not make sense to you unless it is explained. Reading the fine print is important, and understanding these terms —some of which we will define—before applying for a credit card can help prevent misunderstandings or financial headaches.

If you learn these ten terms you should know before applying for a credit card; you will be ready to tackle any offer.

APR (Annual Percentage Rate)

APR is the interest rate you will get charged on your balance for carrying a balance from month to month. The percentage will depend on your creditworthiness and your specific card type. Ideally, you want a lower APR as you’ll pay less interest on any balances.

Credit Limit

A credit limit is the highest sum of money you can spend with your card. The credit card issuer sets the limit, which depends on your income, score, and history. Avoid going over your credit limit; doing so can result in over-limit fees and lower your credit score.

Minimum Payment

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Your credit card balance has a minimum payment, the lowest amount you can pay monthly. This is typically a 1% to 3% monthly payment of whatever balance you have yet to pay off. Making the minimum payment can help you avoid late fees, but it will also lead to paying more interest in the long run.

Grace Period

The grace period is the window within which you can make your credit card payment without worrying about interest. It always occurs 21-25 days after the close of a billing cycle. Not all credit cards have grace periods; however — check with your card issuer.

Balance Transfer

A balance transfer means shifting an existing credit card debt to a new account. This process can be helpful if you are holding a balance on one high-interest card and can move it to a new, lower-rate card.

Annual Fee

An annual fee is a yearly expense associated with having and using a credit card. While not every credit card charges an annual fee, those that do tend to have more benefits, such as rewards or cashback. However, always compare the benefits to the annual fee on cards that charge one.

Credit Score

A credit rating is a number that reflects your creditworthiness. It depends on your credit history, which can include payment history and length of credit history. Better Credit Score = Lower Default Risk + Better Rates and CC Offers

Introductory APR

When you open the account, a reduced interest rate is typically in place for a limited time. Once the introductory period is over, you will face the regular APR, so know when that comes and what rate it will be.

Penalty APR

A penalty APR is a substantially higher interest rate that can be applied to your credit card account if you pay late or exceed your credit limit. The key point to note is that this APR can add a significant amount to the interest charges on any remaining balance, so you should always pay on time and within your credit limit.

Credit Utilization

Your Credit utilization ratio is the ratio of your available credit to the amount you borrow. To calculate your credit card utilization, you divide your total credit card balances with your credit limits. Generally, the lower the utilization ratio, the better your credit score since higher ratios pose a greater risk to lenders.