When we think about credit cards, we think of a simple, small piece of plastic. In fact, these cards represent complex financial instruments. And to understand them, we need to know the lingo.
If you use a credit card, or are thinking about applying for one, then you need to know these eight terms.
A majority of American cardholders regularly pay interest when they carry a balance on their credit cards. That makes it especially important to understand how interest rates are calculated, in the form of APR, or annual percentage rate. This is the rate of interest expressed in an annualized way, which means how much interest would be accumulated over the course of a year.
Yet it’s not that simple. Card issuers can add interest charges to the total, called compounding, every month or even every day. This makes the actual amount of interest charged during a year greater than the result of simply multiplying the balance by the interest rate expressed as an APR.
2. Authorized User
Credit cardholders can add one or more authorized users to their account if they choose. These people receive a credit card under the same account, but the primary or joint account holders are solely responsible for the charges. In addition, authorized users cannot make any changes to an account or claim rewards.
Authorized user credit cards are often used to help those new to credit cards build their credit scores. You can see where your credit scores stand for free every month on Credit.com.
3. EMV Smart Chip
EMV stands for Europay, MasterCard and Visa, but the acronym commonly refers to the microchips embedded in new cards to ensure compatibility with the latest generation of credit card readers already being deployed throughout the world. These microchips are visible to cardholders as a small silver or gold square on the front of their cards. Credit cards equipped with these chips may work as part of a “chip and PIN” or “chip and signature” system. The “chip and PIN” system requires cardholders input a four-digit personal identification number, while the “chip and signature” implementation does not. When cardholders travel outside the U.S., they will not be able to use their credit cards in many locations unless they are equipped with an EMV smart chip.
4. Grace Period
Understanding the grace period is the key to avoiding interest charges in the first place. Most credit cards have a grace period, which is the time between the statement closing date and the payment due date when cardholders can pay their statement balance in full and have their interest charges waived. According to the Credit CARD Act of 2009, the grace period must be a minimum of 21 days following your statement closing date.
5. Prime Rate
The prime rate is the interest rate that banks charge to their best customers, and is typically 3% higher than the federal funds rate. Most credit cards offer variable rates that are based in part on the prime rate and change when it does. For example, as of this writing, the federal funds rate has been at 0.25% since December of 2008, so the prime rate in the U.S. has been at 3.25% ever since. When the prime rate rises or falls, credit cards with variable interest rates will have their interest rates changed by the same amount.
6. Schumer Box
This term describes the standardized format used for disclosing all credit card’s terms and conditions. This format is dictated by federal law, which proscribes the rates and fees that must be disclosed, its format, and even the size of the typeface used. The box is called the Schumer box after Sen. Charles Schumer (D-NY), who championed its passage into law.
7. Statement Period
Cardholders receive 12 statements a year from their credit card, each covering a length of time called the statement period. This month-long period begins on the statement opening date and ends on the statement closing date. These dates are determined based on the statement’s due date, which must fall on the same day each month, and must be at least 21 days beyond the statement closing date.
8. Variable Rate
Before the Credit CARD Act of 2009, card issuers could change customer’s rates for virtually any reason, while referring to the rates as “fixed.” Thankfully, card issuers must now disclose their rates as variable, and these rates are typically tied to the prime rate.
More on Credit Cards:
- How to Lower Your Credit Card Interest Rates
- 6 Smart Credit Card Strategies
- How to Get a Credit Card With Bad Credit
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