Understanding The Fine Print

APR or NPR? Average daily balance or daily periodic rate? Use this handy glossary the next time the fine print (or bold outstanding offer*) leaves you more cross-eyed than credit-wielding.

Average daily balance: The method by which most credit cards calculate your payment due. It’s determined by adding each day’s balance and 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, which is calculated by dividing the annual percentage rate by 12. A card with an annual rate of 18 percent would have a monthly periodic rate of 1.5 percent. So, for example, if that card had a $500 average daily balance it would yield a monthly finance charge of $7.50.

APR, or Annual Percentage Rate: The amount of interest you pay each year on all unpaid credit card bills ‘ e.g., 12 percent interest would be the total amount you paid on your balance over the course of the year, or 1 percent (12/12) each month (see ‘periodic rate’).

Annual user’s fees: Money paid each year for the privilege of owning a credit card.

Bank card: (Also called a debit card.) A card issued by banks which allows you to withdraw money from you bank accounts and make purchases at stores with ATMs.

Balance transfer: The process of moving an unpaid credit card debt from one issuer to another. In other words, a cardholder would transfer the balance on one credit card account to another one with better rates.

Budget: A specific, written plan where you allot a percentage of your income to each category of bills and expenses.

Card holder agreement: The written statement that gives the terms and conditions of a credit card account. The cardholder agreement is required by Federal Reserve regulations, and must include the APR, the monthly minimum payment formula, annual fee if applicable, and the cardholder’s rights in billing disputes.

Cash-advance fee: A charge by the bank for using credit cards to obtain cash. This fee can be stated in terms of a flat per-transaction fee or a percentage of the amount of the cash advance.

Charge card: Like a credit card, but only valid in certain stores; must be paid in full each month.

Compound Interest: Interest which is calculated daily (based upon the APR). It is interest upon the interest. Interest is taken on the total current balance rather than the original purchase amount, so any interest charged on an outstanding balance will be taken from the total amount owed.

Credit card: A plastic card issued by a bank or credit cad company, which gives you instant access to a set amount of money.

Credit limit: The total amount of money you’re allowed to charge on your card.

Debit card: (see Bank Card)

Finance charge: The charge for using a credit card, comprised of interest costs and other fees.

Grace period: The amount of time allowed between a credit card purchase and payment being due before the balance starts gaining interest (usually 20 or 30 days). If there is a balance on the account from previous months, there is no grace period before payment is due on further transactions. If there is no grace period, the amount owed begins gaining interest immediately after a purchase.

Interest: Money you pay for the privilege of borrowing money.

Line of credit: (See Credit limit)

Minimum monthly payment: The least amount you can pay on a credit card bill without the balance becoming overdue and the cardholder is charged late fees. Minimum payments are usually 2 percent of the total balance owed, unless the credit card company is unsure of the cardholder’s ability to pay.

Over-the-limit fee: A fee charged for exceeding the credit limit on the card.

Periodic rate: The interest rate described in relation to a specific amount of time, like the cost of credit for a month (monthly periodic rate) or each day (daily periodic rate).

Pre-approved: A credit card offer with “pre-approved” only means that a potential customer has passed a preliminary credit-information screening.

Secured card: A credit card that a cardholder secures with a savings deposit to ensure payment of the outstanding balance if the cardholder defaults on payments.

Statement of charges: The papers your credit card issuing company sends you every month, telling the total amount you owe them, the due date, etc.

Teaser rate: Often called the introductory rate, it is the below-market interest rate offered to entice customers to switch credit cards or lenders.

Variable interest rate: Percentage that a borrower pays for the use of money, and which moves up or down periodically based on changes in other interest rates.

Sources: ‘Getting Your First Credit Card,’ by Larry Burkett; Bankrate.com’s ‘Read the Fine Print’

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