Saturday, May 29, 2010

Credit Card 11 terms - teaser rate,secured card,pre approved,periodic rate,grace period,floor,finance charge,cardholder agreement,APR,average daily

Reading a credit card statement is tedious enough without adding the extra pressure of understanding the language. However, if you don’t want to put yourself in a big heap of debt – or in frustration city- it’s a good idea to become familiar with the terms and conditions of your credit card. Following are 11 of the most common credit card terms that everyone should be familiar with.

Teaser Rate

Also referred to as the ‘introductory rate’, this is the below-market rate used to get consumers to switch their accounts. The most common teaser rate is the offer of 0% for a period of time.


This refers to a card that uses an account or a deposit as security for a card. Often times when people are building or rebuilding their credit, a credit card company will ask for security in the form of a deposit or an account so that in the event of default, they are not taking a total loss. The credit card’s limit is equal to the security amount deposited


This is nothing but a marketing gimmick meant to reel you in! There is no such thing as a pre-approval in the sense that the term implies because a credit card company cannot check your credit without your permission. So, this is just a preliminary scanning of your basic credit file information. You can be denied a card once they pull your credit report.

Periodic Rate

The periodic rate is a breakdown of the interest rate in relation to a specified amount of time, i.e. the monthly periodic rate is the cost of credit per month and the daily periodic rate is the cost of credit per day. Credit card companies tend to use this in addition to the average daily balance in order to figure out the finance charge and this typically results in a higher fee than adjusted balance. To calculate a monthly periodic rate, take the APR and divide it by 12. Let’s assume that our XYZ card from above has an annual percentage rate of 18%. The monthly periodic rate would be 1.5%. Next we would multiply the average daily balance by the monthly periodic rate. So, our XYZ card with an average daily balance of $200 would be multiplied by 1.5% (200 x .015) which would yield a monthly finance charge of $3.

Grace Period

If a customer does NOT carry a balance on their card, then there is a period of time between the purchase date and the billing date in which no interest is charged on that purchase. However, if there is a balance that is carried forward every month, there is no grace period and all purchases begin accruing interest immediately.


This is the lowest rate possible on any variable-rate loan or line of credit after the introductory period. So, if a credit card company sets a floor percentage rate of 5%, no matter how low the prime rate drops and how good your credit is, your rate will not go below 5% – unless there’s a promotion involved.

Finance Charge

The price you pay for having and using a credit card – this includes interest costs and fees.

Cardholder Agreement

This is the written statement that spells out the terms and conditions of a credit card account. It must include the APR, the minimum payment formula, annual fee if applicable, and billing dispute rights. These terms can be changed at any time by the provider so long as they provide advanced written notification.

Annual Percentage Rate (APR)

This is the total cost of your loan or line of credit (including all fees and costs associated with obtaining the loan) broken down and disclosed as a yearly rate of interest.

Average Daily Balance

The average daily balance is calculated by adding each day’s balance and then dividing that total by the number of days in the billing cycle. So, let’s say that card XYZ’s daily balances total $5,000 and there are 25 days in each billing cycle, then the average daily balance for this credit card is $200. To figure the finance charge based on this balance, the credit card company multiplies the average daily balance by the periodic rate – more on this later.

Adjusted Balance

This term is the most advantageous for the cardholder. Finance charges are calculated by subtracting any payments or credits made during the billing cycle from the account balance, which resorts to a lower interest charge. Not many credit cards figure their finance charges this way.

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