15 Credit Card Terms Explained

Understanding credit card terms helps you make sure you're using the right cards the right way. From basic knowledge like balances to details like offset rights, we'll explain all the credit card terms you need to know.

Here are the 15 most common credit card terms and what they mean.

Key Takeaways

• Pull out your credit card’s terms and conditions, then check our explanations below as you read.
• Being aware of how interest and fees are charged can save you money.
• If you still have questions about your credit card or account, don’t hesitate to reach out to your card issuer for clarification.

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Annual fee

The annual fee is what the card issuer charges you every year to use the card. Sometimes, card issuers break down the fee into monthly payments.

There are many no-annual-fee cards available, but they typically provide less valuable rewards. If you're trying to determine how valuable a credit card is, subtract the annual fee from the rewards earned to see how much value you're actually getting.

APR

APR stands for Annual Percentage Rate. Simply put, the APR is the rate of interest charged over the course of a year if you keep a balance. You'll typically see different APRs for different credit products. For instance, your balance transfer APR might differ from the one for your purchases or cash advances.

Balance

The credit card balance is how much money you have charged (or withdrawn through cash advances) to the card. It's how much you owe the credit card issuer. Keep in mind that your balance also includes any interest you're charged and fees charged by the issuer (like annual fees or foreign exchange fees).

Balance transfer

A balance transfer is the movement of one card's balance to another credit card. You might make a balance transfer if you open a credit card with a balance transfer promotion. So, you might not be charged interest for a few months, allowing you to quickly pay down the balance.

Pro tip: Check to see if you'll be charged balance transfer fees to complete the process.

Cash advance

A cash advance is money you withdraw from your card's credit line. You can access the cash by using an ATM. For instance, if you have a $5,000 credit limit and have already charged $4,000, you could take a cash advance of up to $1,000. Keep in mind that cash advances come with higher interest rates (and your issuer might charge a separate fee).

Credit limit

The credit limit is the maximum amount a cardholder can charge or borrow from the card. Although credit card issuers can't raise your credit limit without your permission, you can ask for a credit increase.

Increasing your credit limit (while keeping your balance in check) can improve your credit utilization ratio, which is the total percentage of credit you're using. If you're in the market for a mortgage or personal loan, lenders will check that your credit utilization ratio is low.</blockquote>

Credit score

A credit score is a 3-digit number that represents how creditworthy you are. Scores range from 300-900, but anything over 660 is considered good. Your credit score is made up of personal factors like your payment history, credit utilization ratio, length of credit history, credit mix, and credit application frequency.

Credit utilization ratio

Credit utilization ratio is the amount of credit you're using compared to how much you have available. It's displayed as a percentage. For example, if you have a card with an $8,000 credit limit and you currently have a $2,000 balance, your credit utilization ratio on that card is 25%.

Equifax recommends keeping your credit utilization to 30% or less.

Foreign exchange fee

The foreign exchange fee is the cost charged for everything you purchase in a foreign country. Most cards charge 2.5%, which can add up fast if you travel for a while (and use your card for everyday purchases).

It is possible to find credit cards that don't charge foreign exchange fees, which can be a valuable benefit if you have a big upcoming trip.

Grace period

A grace period is the window of time between the end of a billing cycle and when your bill is due. The grace period is usually at least 21 days. Once the grace period ends, you'll start accruing interest.

Interest rate

Interest is what you're charged to borrow money, and the interest rate is the exact percentage you're charged. The purchase interest rate is probably the most important rate since it's the rate charged for all goods and services. Most credit cards charge between 20%-25%.

Read your card's terms and conditions to see the interest rate for purchases, cash advances, and promotional rates. It should also specify the grace period – the number of days without interest on new purchases if the outstanding balance is paid by the due date.

Late payment fee

A late fee is a fee your card issuer charges if you're late in making a payment. The fee amount varies, so reading your credit card's terms and conditions is important. Generally, be prepared to pay upwards of $40 per late payment.

Minimum payment

The minimum payment is the minimum amount you must pay every billing cycle to keep your account in good standing. Since your balance changes every month and interest rates fluctuate, your minimum payment will differ every month.

You can always pay more than the minimum (ideally, you should pay off your balance), but you may get hit with a late fee if you don't make a minimum payment.

Offset rights

The "right to offset" (also called offset rights) is the right of a lender to take money from your bank account if you fail to make payments. Although it's rare for credit card companies to do this, it's important to realize that it's a possibility if you don't pay anything.

Unauthorized transaction

An unauthorized transaction is a purchase made without your knowledge or permission. For instance, if your card is lost or stolen and someone makes purchases, these would be considered unauthorized transactions.

It's standard for a credit card to offer zero liability on card transactions, which means the cardholder is not held liable for any unauthorized transactions made on the account.

However, the fine print may state that the cardholder is responsible for "reasonable care" – another way of saying the cardholder is required to protect their PIN and card at all times, not give it out for others to use, and review their statements monthly to report any unauthorized transactions.

FAQ

What is credit on a credit card?

Credit is the money that a card issuer is willing to lend to you, so your credit limit is the maximum amount of money you can borrow. To free up more credit, make payments toward your credit card balance. To request a credit limit increase, reach out to your issuer.

What is a credit card user called?

Typically, someone who uses a credit card is called a cardholder. That's usually how card issuers refer to members in a card's terms and conditions, although this can vary. If you have an American Express card, you're an American Express cardholder.

What is an annual fee for a credit card?

An annual fee is the fee you pay once a year in order to use your credit card. Some cards charge a monthly fee instead. For example, the American Express Cobalt Card charges a monthly fee in every province except Quebec. Avoid annual fees by choosing one of Canada's top no-fee credit cards or finding a first year free offer.

What type of credit are credit cards?

Credit cards are a kind of personal revolving credit. Unlike installment payments, like mortgages or car loans, when you repay a credit card, you regain access to credit that you can borrow from again. You can also access borrowed funds using personal loans or lines of credit.

Where can I find credit card terminology definitions?

Our helpful guide defines 15 of the most commonly used credit card terms, but your card's terms and conditions document should also define credit-card-related terms. If you can't find your paper copy, it should be available in your online account.