If you’ve ever read through a cardmember agreement, you may have thought the bank was speaking a foreign language. The credit industry has its own nomenclature and tends to speak in acronyms.
And while you may not fully understand everything you’re reading, I can assure you that it’s very important to your financial health. What follows is a guide to many of the credit-related terms and acronyms that you will likely see in a credit card’s terms and conditions.
Terms in Alphabetical Order
An annual fee is exactly what it sounds like. This is a fee charged, normally once each year, by your credit card issuer. Some subprime cards break up the annual fee into small monthly amounts paid over the course of the year. Annual fees are usually charged to your account within the first month of account opening.
The APR, or Annual Percentage Rate, is the rate of interest you pay for loans or other forms of credit. The higher the rate, the more you’ll pay to service your debts.
An authorized user is a person added to a credit card account that belongs to another person. The authorized user has full charging privileges on the card but none of the financial liability for payments.
Average Daily Balance
The average daily balance is the method used by your card issuer to calculate interest. Card issuers divide the sum of your daily balances by the number of days in your billing cycle, which is normally around 30.
A balance transfer occurs when you move the existing balances from one or more of your credit cards to another credit card. Transferring balances can be a smart strategy to move interest-accruing debt from one or more cards to a newly opened credit card that has zero interest for a period of time.
Your billing cycle covers roughly 30 days of your credit card’s activity. This includes purchases, credits, payments, fees, and interest. The sum of these things makes up your monthly balance and payment requirement.
CARD Act stands for the Credit Card Accountability, Responsibility, and Disclosure Act of 2009. Among other things, the CARD Act requires a 21-day minimum on cards that offer grace periods, eliminates the issuing of credit cards to people under 21 years old unless they have a job, and all but bars over-limit fees.
The cardmember agreement is your contract with your credit card issuers. The agreement defines the terms of your account. Your card issuers will occasionally amend your cardmember agreement and provide you with a new copy.
A cash advance is essentially a loan taken out against your credit card’s credit limit. Interest begins to accrue immediately on cash advances as they have no grace period.
Cash back is a common form of credit card reward. You can earn a small percentage of cash with your purchases. Cash back can be used as a statement credit against your balance, transferred to a bank account, or credited toward travel accommodations purchased through the issuer’s website, among other things.
A charge card is not the same thing as a credit card. Charge cards have open terms, meaning you have to pay your balance in full each month.
A closed-loop credit card is a method of payment that can be used only at a single organization. These are also referred to as single-purpose credit cards. Many store cards are closed-loop.
Consumer Data Industry Association
The Consumer Data Industry Association or CDIA is the trade association of the credit reporting industry. The CDIA also sets the standards for the credit reporting of credit cards and all other forms of credit.
A co-signer, sometimes referred to as a co-obligor, is someone who is associated with your credit card as another liable party. If the primary card user does not make payment on a card, the card’s issuer can attempt to collect from the co-signer.
A credit bureau or credit reporting agency is a data warehouse that stores credit file data on some 220 million consumers in the United States. The three major credit bureaus in the US are Equifax, Experian, and TransUnion.
A credit inquiry is a record of access into your credit file information. The Fair Credit Reporting Act requires the credit bureaus to maintain a list of organizations that have accessed your credit reports. The credit inquiry is a record of the list.
A credit limit is the upper-most boundary of your credit card’s spending power. Credit limits generally range from a few hundred dollars to tens of thousands of dollars.
Credit monitoring is the process of passively tracking the information on your credit reports for changes that could be indicative of fraud. There are both free and fee-based credit monitoring services, but many credit cards offer free credit monitoring.
Credit Utilization Rate
The credit utilization rate or, more formally, the revolving utilization ratio, is a metric in all general use credit scoring models built by FICO and VantageScore. The ratio is calculated by dividing the sum of your credit card balances by the sum of your credit limits. The lower the ratio, the better for your credit scores.
Creditworthiness is a term to describe the quality of a borrower from a credit risk perspective. For example, someone who has high credit scores is much more creditworthy than someone who has low credit scores. Ultimately, it’s up to lenders to determine whether someone is creditworthy.
Default is a term lenders use to describe an action taken by a lender when a borrower has not made their payment for several consecutive months. Generally, when a borrower goes into default, the lender believes they are not going to get paid and will take other more punitive actions to collect their monies.
EMV stands for Europay, Mastercard, and Visa. EMV credit cards have a computer chip embedded that transmits data at the point of sale like the old-fashioned magnetic strips. But computer chips transmit data much more securely. Most credit cards have EMV chips.
FICO stands for Fair Isaac Corporation and is the most commonly used brand of credit scores. FICO’s credit bureau risk scores were introduced in 1989 at Equifax, and within two years, were available through all three of the credit reporting agencies.
Foreign Transaction Fee
A foreign transaction fee is generally assessed when a cardholder uses their credit card to make purchases in a different country other than the US. Not all cards charge foreign transaction fees.
A fraud alert occurs when your credit monitoring service identifies a change on your credit report that could have been caused by fraudulent activity. These alerts are generally delivered via email.
The grace period is the 21-day period between the date your credit card statement is generated by your card issuer to the due date of the minimum payment. The Card Act of 2009 mandated a grace period of at least 21 days.
A guarantor is someone who has agreed to be liable for your debt if you default. A guarantor is often called an obligor.
The interest rate is the fee charged by a creditor to lend money. Interest rates are heavily influenced by your credit reports and credit scores.
An introductory APR is a temporary annual percentage rate that is normally much lower — often 0% — than your purchase APR. Some credit card issuers will offer introductory APRs as an incentive for consumers to apply for their cards.
A late fee is assessed by your card issuer if it has not received a sufficient minimum payment by the due date. Late fees are generally in the neighborhood of $29-$41.
Miles are a common reward offered by airline rewards credit cards. Miles can be used to purchase airline tickets and other travel related services.
The minimum payment is the amount of money you have to pay your card issuer by the due date to avoid a late fee. The minimum payment is generally a very small percentage of your outstanding balance. When you make only a minimum payment, you roll or “revolve” the remaining portion of your balance and incur interest fees on that amount.
Monthly Maintenance Fee
A monthly maintenance fee is a fee sometimes charged on subprime credit cards to cover the cost of maintaining your account. Not all financial institutions charge maintenance fees.
The outstanding balance is the amount of money you owe your card issuer at any given point in time. You can always pay off the outstanding balance, in full, at any time.
The penalty rate, more commonly referred to as the default rate, is charged by card issuers when their credit card customers miss payments. The default rate/penalty rate is generally much higher than your previously assigned APR. Not all card issuers impose penalty APRs.
Points are a common form of credit card reward. You accrue points by making purchases on your rewards credit card. Points can be redeemed for airline tickets, free hotel rooms, cash, or other rewards.
Your previous balance is the balance of your credit card account in the previous billing cycle.
Primary Account Holder
The primary account holder is the person who applied for the credit card. They are often called the individual account holder for credit reporting purposes.
Regulation Z or Reg Z is known as the Truth in Lending Act or TILA. Among other things, Reg Z requires lenders to disclose up front certain costs associated with credit products, like mortgages and other types of consumer loans.
The revolving balance is the amount due to your card issuer that you do not pay in full each month. If you make only a minimum payment you’re revolving a balance to the next month and incur interest fees.
The Schumer Box is a required disclosure of rates and fees associated with your credit card account.
In consumer lending, the term secured means your account is backed by some sort of asset. For example, if you make a deposit with a bank, it may issue you a credit card that has a credit limit equal to the amount of your deposit. This is a secured credit card.
Auto loans and mortgages are also secured loans because they are backed by assets, specifically the car or the house the bank loan is helping you finance. The bank will repossess the asset and liquidate it to cover its loss if you default on secured debt.
A security deposit is a monetary deposit you make with a bank or credit union. When you do so, the bank or credit union will then issue you a credit card with a credit limit in an equal amount.
A setup fee is a charge by a credit card issuer when it approves and opens a new account for an applicant. Not all card issuers charge setup fees.
A signup bonus is an incentive offered by card issuers to entice new applications. Signup bonuses can be a large amount of cash back, points, or miles awarded to new cardholders. The value of signup bonuses generally ranges from $100 to $1,000 or more, depending on how they’re redeemed.
The statement balance is the amount you owe to a card issuer at the end of your monthly billing cycle. The statement balance generally includes purchases, fees, and interest minus credits and payments.
Subprime is a term used to describe consumers who are high-risk borrowers. Consumers who have credit scores at or below 680 are generally considered to be subprime borrowers. Subprime borrowers will pay higher interest rates and are often denied credit by lenders because they are considered too risky.
Unsecured means there is no asset backing your loan or extension of credit. This means that, if you default on some form of unsecured credit, the lenders have nothing to repossess. Generally, unsecured credit is more expensive than secured credit because it is a greater risk for the lender.
VantageScore is a common brand of credit scoring models. VantageScore is owned by the three credit reporting agencies and was introduced in 2006.
Zero Fraud Liability
All consumer credit cards have zero fraud liability. This means that, if your card is compromised and used without your permission, you will not have to pay for any of those charges as long as you report the fraud to your card issuer.
Many of these terms were probably foreign to you. Others you may have recognized, especially if you’ve been using credit cards for many years. But, to be clear, each of these terms is relevant to your use of credit cards, other forms of credit, and your efforts to protect your credit reports.