9 Credit Terms That Will Help to Increase Your Financial Knowledge
Could increasing your credit vocabulary improve your financial well-being? Test your knowledge of these nine important terms that can help you maintain healthy credit — and get the most from your credit card experience.
1. Annual Percentage Rate (APR)
Credit card companies may charge interest in exchange for letting you carry balances. You may avoid an Interest Charge on purchases if you pay your balance in full each month. However, if you pay less than the full balance, an Interest Charge may be added to your account. The Annual Percentage Rate is a measure of the cost of credit, expressed as a yearly rate. The higher the APR, the more that you will pay.
2. Bottom Line
You may hear this phrase used everywhere, but here's a quick explanation of the financial definition: the "bottom line" is your monthly income less your monthly expenses.
3. Balance Transfer
You may be able to transfer a balance from one credit card to another, usually to take advantage of a lower interest rate. Transfers are limited to the available credit on the receiving card.
If you think your bill is wrong, write to your credit card issuer at the address listed on your statement, within 60 days of receiving the first statement where the error appeared. The credit card issuer must acknowledge your letter within 30 days, and correct the error or explain why they think the statement was correct within two Billing Cycles, but no later than 90 days after the receipt of your letter.
And here's a tip to help your dispute: If you notify the credit card issuer of a possible error in writing, you may not have to pay the amount in question while it is investigated. (Though you do have to pay the rest of your bill.)
5. Grace Period on Purchases
Many credit card issuers give you a Grace Period on Purchases if you pay your balance on your statement by the due date each month. If you don't, you may not get a Grace Period on Purchases until you pay the balance by the due date for two months in a row.
6. Secured Card
A Secured Card is a credit card that is collateralized, or partially collateralized, by a cash deposit held in a special savings account or certificate of deposit. Some banks may require that the deposit remain in the account until the credit line is closed or the bank decides security is no longer necessary. The credit line on the card may sometimes equal to the amount of the deposit. If the cardmember defaults on the card, the issuer may apply the deposit towards the outstanding balance.
7. Variable Interest Rate
A Variable Interest Rate is an interest rate that changes based on an economic index such as the Prime Rate or the U.S. LIBOR Rate. For example, a variable rate credit card with an interest rate like "Prime + 5.9%" means that the interest on the card is based upon the Prime Rate plus an additional 5.9%.
Not entirely sure how Prime Rates are calculated? Read on.
8. Prime Rate
The Prime Rate is the interest rate that some major banks charge to many of their best corporate borrowers. Each bank sets its own Prime Rate, though because the rate is so competitive, sometimes the rate is the same at all banks.
For consumer loans — including credit cards — banks and other lenders may use the Prime Rate as a base for calculating variable interest rates. For example, a credit card might carry an Annual Percentage Rate (APR) based upon the Prime Rate + 7.4%. If the Prime Rate today is 3.25%, the rate on the loan will be 10.65% (3.25% + 7.4% = 10.65%). If the Prime Rate drops to 3% when the price on the loan is next evaluated, the rate on the loan may go down to 10.4% (3% + 7.4% = 10.4%).
9. Revolving Credit
Never again will Revolving Credit make your head spin. Simply put, it's a credit agreement that allows consumers to pay all or part of the outstanding balance on a line of credit or credit card. As the balance is paid off, it becomes available again to use for another purchase or Cash Advance.
Looking for more definitions? Check out Citi's A to Z glossary of the most commonly used credit terms.