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Appendix: Credit Card Terminology

Acquiring Financial Institution

Merchants keep an account with an acquiring financial institution to receive credit for credit card transactions. Daily credit card receipts are deposited into the merchant’s account, less any fees.

Adjusted Balance

Typically the most advantageous method for cardholders. Finance charges are based on account balance remaining after adjusting for payments and credits posted during the billing period. Interest charges under adjusted balance method are usually lower than using adjusted daily balance method.

Affinity Card

Offered by a nonlending institution and a nonfinancial group (such as nonprofit organizations, universities, airlines, or celebrities). Typically, the organization solicits all of its members and the affinity card gives holders special discount or deals from the nonfinancial group. The organization receives brand loyalty from card users and a small percentage or fee from the credit card company.

Air Miles

A popular reward program by co-branded cards. Air miles are earned with every use of the card and transferred to the cardholder’s account with that airline.

APR (Annual Percentage Rate)

A yearly fixed or variable interest rate that measures the cost of credit. Reflects the total yearly cost of the interest on a loan, expressed as a percentage rate. The credit card company must inform you about the APR before you sign on for a credit card. Often, the introductory APR is the first thing you see on the credit card offer, either on the envelope or at the very top of the first page. Read the back of the offer for the conditions and how this rate may change.

Some credit card companies offer a variable APR linked to an index performance. The rate change affects the finance charge on your account.

A low fixed rate is usually better that a low variable rate. A fixed rate card must give you 15 days notice of a rate change.

This is an example from the FTC (Federal Trade Commission) of how the APR affects your payment. If you have an outstanding balance of $2,000 with 18.5% APR and a low monthly minimum payment, it would take over 11 years to pay off the debt and will cost you $1,934 just in interest, almost doubling the original cost of purchase.

Annual Fees

An annual membership or participation fee charged for some credit cards. On average, the fee ranges from $15 to $55. Some issuers charge no annual fee.

Authorized User

A person given permission to use a credit card account.

Average Daily Balance

Most widely used balance calculation. Credits your account from the day payment is received by the credit card company. Calculated by adding each day’s daily balance then dividing that total by the number of days in a billing cycle. The average daily balance is then multiplied by a card’s monthly periodic rate (divide the annual percentage rate by 12). Depending on the details of your plan, new purchases may or may not be added to the balance; cash advances are usually included. The new daily balances are added to the billing cycle.

Balance Transfer

Moving an outstanding credit card balance from one issuer to another.

Balance Transfer Fees

Fee charged for transferring an outstanding balance from one credit card to another.


If you are absolutely unable to pay your debts, this is the last resort for financial protection. Each plan must be filed in federal bankruptcy court. Individuals who follow the bankruptcy rules receive a discharge—a court order stating that they do not have to repay certain debts.

There are two types of personal bankruptcy:

Chapter 7—Eliminates all debts except some taxes and possibly alimony payments. This plan liquidates all assets that are not exempt, such as cars, work-related tools, and basic household furnishings. A court-appointed official may sell the property or it may be turned over to creditors.

Chapter 13—Allows a borrower with a stable income and limited debt to pay off bills under a court-approved repayment plan over a 36- to 60-month period rather than surrender any property.

Both types of bankruptcy generally eliminate unsecured debts and stop foreclosures, repossessions, and debt collection activities. However, you are still liable for child support, alimony, fines, taxes, and some student loan obligations.

Bankruptcy is to be undertaken only with very serious consideration because it severely limits future access to credit, such as a home mortgage and car loan. Bankruptcy may be reported on your credit report for up to 10 years.

Billing Period

The number of days between the last statement date and the current statement date.

Billing Statement

The monthly bill you receive from the credit card company. Includes a summary of all account activity, including purchases, payments, credit limit, available credit, and finance charges. Monitor the reverse side of the credit card statement and the small-print fliers for important information on changes to your credit card account.

Cardholder Agreement

Required by the Federal Reserve. A written statement that provides the terms and conditions of a card account. It must include the annual fee, minimum payment formula, Annual Percentage Rate, and cardholder’s rights in billing disputes.

Cash Advance Fee

Credit cards allow cash advances, but they comes with a fee. The checks attached to your monthly statement also create cash advance transactions when used. The fee may be per transaction or may be a percentage of the cash advance. The cash advance fee is costly because there is no grace period and interest accrues as soon as the money has been withdrawn, and is usually between 2% and 5% of the amount advanced.

Most issuers consider the cash you get with a purchase (even $20) a cash advance. The exception is Discover, which offers cardholders up to $100 in cash above the amount of their purchases at select merchants without charging the cash advance fee.

Cash Cards

Cards with a pre-established value and read by a special cash card reader. The card is drawn down until the value is zero. Beware that these cards are like cash, as they have no built-in security if lost or stolen.

Cash Rebates

This credit card allows the user to earn cash “rewards” with each purchase. Companies make money not only through annual fees and finance charges but also from each purchase you make. They typically receive between 1% and 3% of your purchase. A cash rebate returns some of that fee to your pocket.

Chapter 7 Bankruptcy

Gets rid of all debts except some taxes and possibly alimony payments. Liquidates all assets that are not exempt (cars, work-related tools, and basic household furnishings). Some property may be sold by a court appointed official or turned over to creditors.

Chapter 13 Bankruptcy

Allows a borrower with a stable income and limited debt to pay off bills under a court-approved repayment plan over 36- to 60 months rather than surrender any property.

Charge Card

Requires a full payment of the charge by the due date. There is no carryover balance or interest rate charge. Charge accounts with local businesses often require payment on this basis.


An accounting entry for a credit card account that has not been paid (delinquent) for a certain period, typically 180 days. The issuer removes the account from its books as an asset. After the account is charged off, the outstanding balance is classified as a loss, meaning that the lender has given up hope on collecting the debt. The lender then sells the debt to a third party, typically a collection agency, that will attempt to collect the debt.

Closed-Account Fee

Fee for shutting down an account. Possibly charged if the account is closed before a minimum period has passed.

Co-branded Cards

Credit card issued in partnership between a bank and another retail company. Similar to an affinity card. Many departments offer co-branded cards with special deals or discounts on purchases at their store. Co-branded cards often come with a large annual fee.

Consumer Credit Counseling Service

Service that analyzes consumer debt and spending. Provides counseling and a plan for an achievable budget and debt repayment, and works with creditors. Helps the consumer pay back debts over time.


A joint signer with the principle applicant on a credit card application. If the principle applicant defaults on what he owes, the co-signer is responsible for paying the balance due.

Credit Reporting Agency

A company that compiles credit activity into a credit report. This report includes where you work and live and how you pay your bills. It even includes whether you have been sued, arrested, or filed for bankruptcy. These reports are available to individuals and lenders with a valid need for the information. The three major credit bureaus are Equifax, Experian, and TransUnion.

Credit Card

A plastic card with a coded magnetic stripe that entitles the holder to a line of credit. The borrower’s income and credit history as reported by the credit report determines the amount of credit and the interest rate.

Credit Insurance

Insurance that pays off the credit card debt should the borrower lose his job, die or become disabled. The payoff is calculated monthly to only cover the debt recorded on the last billing cycle.

Credit Limit

The maximum amount of credit allowed on an account.

Credit Report

If you have ever applied for a credit card, a personal loan, or insurance, there is a file on you. This file includes where you work and live and how you pay your bills. It even includes whether you have been sued, arrested, or filed for bankruptcy.

Credit reporting agencies gather and sell this information to creditors, employers, insurers, and other businesses. Periodically check your credit report for accuracy to be aware of what has been reported and to correct any errors. To check your credit report, contact the three major national credit bureaus: Equifax, Experian, and TransUnion. Or you can access these reports at

Credit Scoring

A scoring system used by creditors to determine if you are a good risk for credit cards, auto loans, and home mortgages. Analyzes data from your credit application and credit report on your history of paying bills, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts. It treats all applicants objectively by comparing your credit information with the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay debt. The lower your score, the higher your interest rate.

Debit Card

Looks like a credit card but is issued by your bank. Charges are drawn directly from the cardholder’s account, typically a checking or a savings account. The withdrawal of funds is immediate with online debit cards and delayed a day or two with offline debit cards. Debit cards with the MasterCard or Visa logo may be used at any location that takes MasterCard or Visa credit cards.


Failure to make payments according to the terms of the cardholder agreement. This could be a late payment, no payment, or paying less than the minimum amount due. This gives the creditor the option to penalize you with a higher interest rate. Your account is charged as delinquent if you go 30 days without making a payment, and will possibly be noted on your credit report. Call the issuer and work out a plan before you fall behind.

Delinquency Rates

Some cards with low rates for on-time payments apply a very high APR if you are late a certain number of times during a specified period. Look at your credit card application for these special delinquency rates because these can sometimes exceed 20%.

F (Fixed)

If the letter “F” follows the annual percentage rate (APR), the rate is fixed and not adjustable.

Fair Credit Billing Act

Act passed by the Federal Trade Commission to help customers resolve billing disputes with card issuers and limit consumer liability for unauthorized credit card use. The act was written to promote accuracy and ensure the privacy of information used in consumer reports. You have the right to know everything in your report. Moreover, the credit reporting agency must give you a list of everyone who has requested your report in the past year or in the past two years if such an inquiry was for employment purposes.

Fair Credit Reporting Act (FCRA)

Act passed by the Federal Trade Commission that holds credit reporting agencies responsible for correcting inaccurate information in credit reporting. Entities that give information to the credit reporting agencies are required by the FCRA to provide accurate information. Also limits disclosure of consumer credit reports only to entities with specified purpose.

Finance Charge

The charge for using a credit card, including interest rates and other fees.

Foreign Currency Surcharge

Charge by some credit card dealers that adds an additional charge for purchases made in a foreign currency.

Free Period

Also called “grace period.” An interest-free period that a lender allows for between the transaction date and billing date if no balance is carried over from the previous billing cycle. Generally, the free period is between 20 and 30 days. If your card includes a free period, the issuer must mail your bill at least 14 days before the due date, to give you enough time to pay. People who carry a balance on their cards do not receive a free period and finance charges begin the date a purchase is made with a credit card.

Gold Card

Offers a larger line of credit than a standard card. Credit line is usually between $2,000 and $5,000. Income requirements are higher, typically $35,000 at minimum. Gold card users receive extra perks and incentives such as travel service, rental card insurance, and insurance for purchases.

Grace Period

Also called “free period.” The interest-free period of time a lender allows for between the transaction date and billing date if no balance is carried over from the previous billing cycle. Generally, the grace period is between 20 and 30 days. If your card includes a grace period, the issuer must mail your bill at least 14 days before the due date, to give you enough time to pay. People who carry a balance on their cards do not receive a grace period and finance charges begin the date a purchase is made with a credit card.


A published market-based figure used by creditors to establish a lending rate. The most common indices are the one-year Treasure Constant Maturity Yield; the Federal Home Loan Bank 11th District Cost of Funds; and the prime rate as listed in the Wall Street Journal.

Indexed Rate

Sum of the published index plus the margin. For example, if the index is 10% and the margin is 3.50%, the indexed rate is 13.50%.

Interest Rate

A charge for borrowed money that is generally a percentage of the amount borrowed. It is disclosed as an APR on the credit card form.

Introductory Rate

The “teaser” low rate charged by a lender for an initial, temporary period to encourage customers to switch cards. After the introductory period is over, the charged rate increases to the indexed rate or the interest rate.

Joint Credit

Credit offered to a couple based on both of their assets, incomes, and credit reports. The couple usually qualifies for a higher credit limit but both parties are liable for the debt.

Late Payment Fee

Penalty charged for not making the monthly payment by the due date or the published deadline of payment as printed on the billing statement (the creditor must receive payment by this date). The fee is usually a flat dollar amount.

Minimum Payment

The smallest payment that keeps the account from going into default. A minimum can be as low as 2% of the outstanding balance.

Monthly Periodic Rate

The interest rate factor used to determine the interest charges on a monthly basis. The yearly rate (APR) divided by 12.

National Foundation for Consumer Credit (NFCC)

Nonprofit group that educates consumers about using credit.

Offline Debit Card

A combination of an ATM and credit card. Contains the MasterCard or VISA logo and can be offered by a bank in place of or in addition to an ATM card. After a delay of 24 to 72 hours, charges are drawn directly from the cardholder’s account, typically a checking or savings account. Concluding a transaction by signing a slip of paper indicates the transaction was done offline.

Over the Limit Fee

Charged for using more than the credit limit on your card.

Penalty Rate

After one or two late payments (varies between credit cards), adds several percentage points to the current APR.

Periodic Rate

The interest rate described in relation to a specific period, either monthly or daily.

Personal Identification Number (PIN)

The personal security number required to be entered into a keypad at the point of sale to complete the transaction. The cardholder usually selects the number and can change it.

Platinum Card

Credit card with a higher limit and more perks than both a standard card and a gold card.

Point of Sale

Use an online debit card to get a cash return at the point of sale, such as a grocery store or convenience store. Avoids ATM surcharges.


The applicant has passed the first round of credit-information screening. However, this does not guarantee a credit card and the company can still turn the applicant down if the applicant’s credit rating is unsatisfactory.

Previous Balance

System used by card issuer that bases finance charges on the amount owed at the end of the previous billing cycle. Does not include payments, credits, and new purchases made during the current billing period.

Prime Rate

The interest rate a bank charges its top customers. Many issuers use the prime rates established by large financial institutions, such as Citibank or Chase Manhattan, or the Wall Street Journal’s prime rate average. Credit card rates are often the prime rate plus a certain percentage to cover its risk in lending and its profit margin.

Rebate Card

The card allows the customer to accumulate “rewards,” such as merchandise, cash, or services based on card usage. Rewards are usually airline tickets, discounts on future purchases, or cash refunds.

Secured Card

Credit card used by people trying to rebuild their poor credit or by beginners establishing their credit. The cardholder’s savings deposit or bank account guarantees payment of the outstanding balance if he defaults on payments. Credit line represents 50% to 100% of the security deposit. Many have application and processing fees.

Standard Card

The basic card offered by credit card companies.

T (tiered)

Tiered pricing is indicated by the letter “T” after the APR. With tiered pricing, different levels of outstanding balances have different periodic rates. The rate shown is for the lowest of the balance tiers and is based on the outstanding balance, cumulative charges made, or the cardholder’s credit and risk rating.

Teaser Rate

The introductory rate. Usually a temporary lower rate to encourage customers to switch credit cards. After the teaser rate expires, the charged rate increases to the indexed rate or the interest rate.

Transaction Fees and Other Charges

As if annual fees aren’t enough, credit card companies may charge a fee if you make a late payment, exceed your credit limit, or get a cash advance. Some even charge a monthly fee whether or not you use the card.

Transaction Date

The purchase date of goods or services or the date of the cash advance.

Truth in Lending Act

Federal law that protects consumers by requiring lenders to publish specific information to allow borrowers to compare cost and terms of credit offered by lenders. Lenders must publicize finance charges in dollars and as an annual percentage rate (APR); the length of the grace period, if any; annual fees; minimum payment required; and the company providing the credit line and the credit limit.

Two-Cycle Balance

Uses the account’s last two months of activity. This eliminates the grace period and the finance charges are usually higher. The interest on a balance is retroactive to the date the purchases were posted to the account. Several different two-cycle methods exist.

Unsecured Debt

Debt that is not backed by the promise of any collateral, such as a savings deposit. Most credit cards are unsecured debt. To compensate for this additional risk, credit card issuers charge higher interest rates than other forms of lending, such as a home mortgage.

V (Variable)

The credit card interest rate is variable and subject to change if the letter “V” appears after the annual percentage rate (APR).

Zero Balance

The outstanding balance has been paid and no new charges have been added during the billing cycle.

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