Whether you’ve been using a credit card for decades or just starting out, it’s likely that you may not have a full understanding of every single term on your credit card statement. But don’t worry, you’re not alone – and most aren’t as complicated as you think. To help you better understand what your credit card terms and conditions are trying to tell you, check out some of our easy–to–understand explanations below.
Simply put, a cash advance fee applies whenever you take cash out using your credit card (rather than your debit card). Most commonly, cash advances are made through an ATM. Although being able to withdraw cash using your credit card might seem convenient, you’re effectively borrowing money, so it can be an expensive way to go about it. Typically, the fees are between 2% and 5% of the amount you are withdrawing – so if you take out $500 with a credit card that has a 5% cash advance fee, you’ll be charged an additional $25.
Using a credit card to buy products and services is like taking out a short–term loan, so – as with any other loan – you are liable to pay interest on your purchase transactions unless you pay off what you owe each month in full. In many cases, the APR (annual percentage rate) on credit cards varies month to month because it can be tied to an economic index such as the Prime Rate or the LIBOR Rate, which is the interest rate some major banks charge their best customers. The interest rate on your credit card may go up or down in line with the index, and could include a margin set by your lender or credit card provider.
The card verification value (CVV), or card security code (CSC), helps to verify that you’re physically in possession of the card and to protect you against fraud when you shop online. You could be asked for this three– or four–digit number whenever you buy products online, so it is important to know where to find it – typically on the signature strip on the reverse of the card, but on certain cards it may be on the front.
If you have a low credit score – for example, because you’ve regularly missed loan repayments – you are considered to have adverse or impaired credit. A poor credit score can make it more difficult for you to borrow money or be approved for a credit card. The information on your credit history is collected by credit bureaus – specialist firms that track your borrowing history. Finding out what your credit score is before applying for any kind of credit, including a credit card, is a good idea, says Rick Harper, Director of the National Foundation for Credit Counseling: “Know your score before shopping for a loan. With this information, you can shop around for favorable terms more effectively.”
Also known as your credit utilization ratio, this is the amount of money you owe on your credit card, as a proportion of your credit limit. It’s an important number because it can heavily influence your credit score. Calculating your balance–to–limit ratio is easy: divide your outstanding credit card balance by your credit card limit, then multiply the answer by 100 to get a percentage figure. So, if you owe $150 on a card with a $1000 limit, your balance–to–limit ratio would be 15%.
“Your debt–to–income ratio is the total of all your monthly debts, including instalment loans, divided by your total monthly income,” says Rod Griffin, Director of Public Education at Experian.
Your credit card company or other lender will use your debt–to–income ratio to assess how healthy your finances are, and how much extra credit you can comfortably take on. A low debt–to–income ratio means your income can cover your debt, while a high ratio is an indication that your debt may be too big in relation to your income.
To work out your debt–to–income ratio, add up your total monthly income – including benefits, pay before deductions, or things like alimony. Then add up your total fixed monthly expenses (like your rent or mortgage), but exclude variable expenses, such as travel, food, gas, and utilities. Finally, divide your total monthly expenses by your total monthly income and multiply the result by 100. This will be your debt–to–income ratio. Since the ratio gives lenders an indication of how much additional credit you can handle, the lower your ratio, the better your chance of getting credit.
This is a fee that may be charged each time you use your credit card for purchases overseas – and often when you shop online from a foreign retailer. The foreign transaction fee is typically around 3% of the amount of the purchase after conversion to U.S. dollars – so if you spend $3,000 in purchases on your vacation, you will incur foreign transaction fees of $90.
Armed with an understanding of complex but common credit card terms, you will be able to make better decisions when it comes to your financial health. For more tips on how to use credit wisely check out 3 Smart Ways to Improve Your Credit Health.