When it comes to choosing or switching credit cards, we’ve said time and again that it pays to shop around. That’s all very well, provided you know just what’s being offered by the many thousands of different cards on offer. To help you steer your way through just some of the seemingly confusing terms and expressions that you’ll come across, the following brief glossary might be useful.
Annual Fee
This is a yearly fee charged simply for having a credit card issued in your name. It used to be justified as an “administration” charge. These days, few credit card companies charge such a fee, so your aim is to avoid paying one!
Annual Percentage Rate (APR)
This is the most fundamental of all the terms describing your credit card. It is the effective rate of interest, over the year, which reflects all the costs of the credit card, including interest charges and other fees (such as an initial arrangement fee and any annual charge).
Balance Transfer
This is what you do when you transfer an outstanding credit card balance from an existing credit card to a new one. Hungry for your business, the majority of credit card providers will offer you at least a temporary low interest balance transfer of 0% (i.e. you pay no interest on the balance transferred to the new card). Beware, however, of a creeping tendency on the part of credit card providers to charge an initial fee for making the transfer and also check out whether the zero rate of interest applies for a specified period of time or throughout the lifetime of the transferred balance (i.e. until it has been paid off).
Cash Advance
You obtain a cash advance by using your credit card to draw cash. Cash advances will invariably attract interest from the moment they are made, so there is no “interest free” period of grace.
Cash Advance Fee
You will also be charged for using your card to draw cash. The charge might be made as a flat-rate fee on each withdrawal or taken as a percentage of the amount of cash advanced.
Cash Advance Rate
This is the rate of interest attracted by your cash advance. As noted above, interest is invariably attracted from the moment it is made and the rate of interest for this facility could be higher than the card provider’s standard rate on regular purchases.
Cash back
Cash back offers fall under the general category of “reward” schemes, which are used to encourage you to use your credit card more. Cash back schemes vary widely and can offer between a negligible 0.1% up to 2% cash back on card purchases. Simple arithmetic, however, will tell you that if you start to pay interest on your purchases at a standard rate and the cash back is only 2%, then you are far better off repaying the outstanding debit balance on your card, rather than chasing cash back payments.
Credit Limit
This is the maximum amount that your credit card company will allow as credit i.e. a limit that cannot be exceeded as the balance owing on your credit card.
Introductory Rate
In order to win your business, a credit card company will usually be prepared to offer a lower rate of interest on credit for a temporary, introductory period. At the end of this time, the company is likely to impose its standard variable rate on future credit purchases.
Minimum Payment
This is the minimum amount you must pay in any one month in order to meet your credit repayment agreement with the credit card company. The amount of the minimum payment is usually calculated as 2% or 3% of the outstanding debit balance.
Overseas Transactions
If you use your card abroad (or to buy in a foreign currency over the internet), most credit cards will charge a currency conversion fee. This is on top of the normal interest attracted by your credit purchases.
Reward Scheme
A scheme which “rewards” your use of your credit card by awarding points, which can then be redeemed for specified kinds of goods or services (anything from discounts on cars, to flights, holidays and days out). Beware the cost you could be paying for such apparent “gifts” – if you’re also paying interest on spending on your card, the price of that interest will far outweigh the benefit of any “rewards”.
Statement Date
This is the effective date of the statement you will receive from your credit card company summarising all the activity on your account – purchases, payments, credits, charges, any other transactions and the monthly outstanding balance.
Withdrawal Limit
This relates to cash advances and is the maximum you can withdraw, either at a cash machine or over the counter at a bank, in any single day.
