Understanding the Terms

Perhaps this is your first credit card, your first application for credit or maybe like me you just dont have time or the inclination to read a five page leaflet of terms and conditions in very small print.

Back to Basics – Understanding Five Main Credit Card Terms
 by: Joseph Kenny

Credit cards are simple, arent they? You have a set credit limit either you asked for or they gave you (say £3000 for example). As long as your balance (which is what you are owing) isn't as high as your credit limit, you can pay for things with your credit card. Paying for something by credit card means you don't have to settle the bill until some time after (normally 30 days). For unpaid credit over 30 days you pay interest on your credit card balance.

FAQs. Here are some frequently asked questions and their answers about credit cards.

What is interest?

In a nutshell, interest is money that you pay a lender for the privilege of using HIS money to buy something.

What's this about 'interest rates' and percentages?

The interest rate is a way of determining how much you're paying for borrowing money on your credit card. It's stated as a percentage of the outstanding balance on your card, usually as an APR or annual percentage rate. The lower the APR, the less interest you're paying on the amount you owe.

Okay - so why would anyone choose a credit card with a high interest rate?

Most people don't CHOOSE to pay a high interest rate. The bank decides what interest rate it will charge you, usually based on how much of a 'credit risk' you are. They determine that by looking at your history of paying bills. If you've got a history of paying bills on time, then you'll qualify for lower interest rates. If you haven't ever had any bills to pay, or if you've had trouble paying your bills, that will show in your credit history, too. Since it's a little riskier to lend you money, banks will charge a higher interest rate.

One other reason that people might actually choose a credit car with a higher interest rate is for the rewards or privileges that come with that card. If the card includes special perks that you want, they may offset the higher interest rate and make it worthwhile.

My card says that I pay interest on the 'outstanding balance'. What does that mean?

Your outstanding balance is the amount that you owe altogether on your credit card. Credit card companies generally calculate what's called an 'average daily balance' for each month and base your interest charge on that. If you had a £50 balance from the first of the month to the twentieth, then charged a £400 computer, your interest will be computed on the average between 20 days at £50 and 10 days at £450.

What is the 'minimum payment'? As long as I pay that, I'm fine, right?

The minimum payment is the lowest amount that the credit card issuer will accept toward your balance. It varies from month to month, depending on your balance. Paying JUST the minimum balance may keep your credit card active and keep the credit card company from reporting your account as delinquent, but it will barely make a dent in the amount you owe. Whenever possible, you should pay more than the minimum amount. In fact, it's best to try to pay off your balance in full each month to avoid paying interest charges.

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This article was posted on April 19, 2006