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Common credit card terms you should know about

Matt Avatar By: Matt | Last updated February 13, 2019

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The language of credit cards is a very tricky and confusing one. Although plastic currency is becoming more and more popular all over the world, few are those who really know and understand the jargon associated with their Visa or MasterCard.  

Here are some of the most common financial terms you should know when it comes to credit cards:

  • Credit limit. Although this one is quite self-explanatory, there are still people out there who scratch their head whenever they hear the term. The credit limit on your card is the maximum amount of money you are allowed to spend at any given moment. In some cases, you can exceed this limit, but we advise you not to, because if you do, you’ll be forced to pay penalty fees. Depending on your repayment history, that limit may be increased or decreased by your credit card issuer
  • Annual percentage rate (APR). This is usually lower for people who have a good credit score and higher for those with bad credit history and issues. The APR can be fixed or variable, with the latter being the case for most credit cards nowadays. While the fixed APR stays the same, the variable rate fluctuates throughout the year
  • Default rate. It is a higher interest rate charged by you issuer if you don’t make your monthly payments on time. It is a type of penalty and it can be reverted to the initial APR if you make 6 consecutive payments on time
  • The balance is the amount you have on your credit card before you make your monthly payment. For instance, if you charge $500 in a month, your balance would be that $500, plus your APR and any additional fees. If you have a higher balance for an extended period, that will affect your credit score
  • Grace period. It refers to the period of time (typically at least 21 days) given to pay the aforementioned balance, before a charge is applied. During this time, which is calculated from the close of your previous billing period and until the next payment due date, issuers won’t charge you any interest if you make new purchases. Almost all credit card issuers offer a grace period nowadays so it is best to opt for a credit card that has a grace period (it is easier to accomplish if you have a good credit score)
  • Cash advance fee. It applies when you choose to take cash out from your credit card (usually through an ATM). Cash advance fees can go from 2% to 5% of the amount you are taking out, so it’s not as convenient as you would think to withdraw money from your credit card
  • Card verification value (CVV) or card security code (CSC) is a 3 or 4 digit number found on the back of your card (usually on the signature strip). The CVV/CSC are very important to protect you against online fraud when you buy something on the Internet. Online sellers ask for these codes so they can verify that you are really in the possession of the card
  • Balance-to-limit ratio. It is what you owe on your credit card depending on your credit limit. The way you can calculate it is to divide your balance to your credit limit and multiply the answer by 100. The result is the percentage that represents the balance-to-limit ratio. For instance, for someone with a balance of $500 and a credit limit of $2000, the balance-to-limit ratio would be 25%.