redit Terminology: The Cost Of Credit, Balance Transfer, Daily Periodic Rate, Finance Charge and Minimum Payment
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Credit TerminologyFollowing are some terms you need to know as a borrower: The Cost of Credit Truth in Lending helps you compare costs by requiring creditors to give you certain basic information about the cost of buying on credit or taking out a loan. These disclosures can help you shop around for the best deal. Consumer lending disclosures can help you compare the cost and terms of one lease with another and with the cost and terms of buying for cash or on credit. Credit costs vary. By remembering two terms, you can compare credit prices from different sources. Under Truth in Lending, the creditor must tell you (in writing and before you sign any agreement) the finance charge and the annual percentage rate. The finance charge is the total dollar amount you pay to use credit. It includes interest costs, and other costs, such as service charges and some credit-related insurance premiums. Balance Transfer The process of moving one outstanding balance from one credit card issuer to another. Balance Transfer Fee A balance transfer fee is a transaction fee that is charged to the cardholder's account when transferring an outstanding balance from one credit card to another. Cash Cards Like a pre-paid phone card, cash cards have a set cash amount value and are debited for each use. Therefore, similar to that of losing cash, if the cash card is lost or stolen, it can be used by anyone. Neither can it be cancelled, as can a lost, or stolen credit card. Merchant A retailer, corporation, firm, or any type of business, or person that has agreed to accept a payment in form of a credit card and/or debit card. Co-Branded Card A credit card is one issued by a merchant and merchant bank. Both brands are displayed on the card. Authorized User An authorized user is an individual, or group of individuals who have access to a credit card account, other than the primary cardholder. However, the authorized user usually does not have full access to a credit card account as would the primary cardholder. Credit Available Your credit available is the amount of your limit minus your current balance. This determines the amount of credit that may be used. The amount changes as your balance changes. Corporate Card A credit card is issued and billed to companies for use by their employees. Credit Insurance A policy usually offered by a third party that covers at least the minimum payment (often for a limited period of time) in the event the cardholder loses his, or her job, dies, or becomes disabled. EFT (Electronic Funds Transfer) A paperless transfer of funds authorized and/or initiated from a computer, telephone, or magnetic strip. An example of an EFT - a cardholder authorizing a direct deposit over the phone with his, or her credit card. Daily Periodic Rate Simply the annual percentage rate divided by the number of days in a year (often referred to as the 'daily interest rate'). Debit Card A type of ATM card that withdraws funds directly from your checking account for each purchase that is made with the card. There are no finance charges, and your limit is represented by the amount of money in your checking account. Fixed Interest Rate If the cardholder uses the credit card outside of the United States, a fee (usually between 1% to 2%) is imposed by the credit card issuer, based on the cost of the purchase made. Finance Charge A finance charge is a type of interest rate that is fixed and will not change in relation to other fluctuations in other indexes. For example, if the fixed interest rate is 9.5%, it will not change for the time period agreed between the cardholder and the account issuer. Minimum Payment Represents the minimum amount of money you are obligated to pay each month against your credit card balance. The figure is determined by the size of the balance and the formula the lender chooses to use in determining the minimum amount due. Monthly Periodic Rate The annual percentage rate divided by the number of months in a year. Payment Due Date The date in which the credit card issuer must receive at least your minimum payment. Secured Credit Card A type of credit card in which one must maintain a savings account to secure the line of credit for the card. The savings account generally equals 50%-100% of the actual line of credit. Secured Debt A type of debt that is secured by collateral such as a house (a mortgage or a home equity loan) or a car. Transaction Date The transaction date is that on which the cardholder used his or her credit card for a purchase or cash advance. Transaction Fees Charges that are applied to your credit card balance by the credit card issuer (cash advance fees, late payment fees, returned payment fees, stopped payment fees, and over-the-credit-limit charges). Two-Cycle Billing Though rarely used, the two cycle billing determines the average daily balance based on two billing cycles. This method is more costly to the cardholder who does not pay in full and carries a balance, as interest is charged back to the date in which the purchase was originally made, initially wiping out the cardholder's grace period. Affinity card A card offered by two organizations, one a lending institution, the other a non-financial group. Schools, non-profit groups, pro wrestlers, popular singers and airlines are among those featured on affinity cards. Usually, use of the card entitles holders to special discounts or deals from the non-financial group. See also co-branded cards. Air miles One of the most popular rewards issued by airline-affiliated co-branded cards. Air miles are earned with every use of the card and are then transferred monthly to the card holder's account with that airline. Annual Percentage Rate (APR) The APR is the interest rate reflecting the total yearly cost of the interest on a loan, expressed as a percentage rate. Under the federal Truth in Lending Act, it must be calculated in a standard way to allow consumers to make 'apples to apples' comparisons of lending terms. Bankruptcy Bankruptcy is the last resort for a borrower. If the borrower has difficulty meeting rent or mortgage payments and is completely extended beyond the credit limit, and the collection agencies are uncooperative, the borrower may need to file for protection. There are two basic ways of filing for personal bankruptcy. A Chapter 7 bankruptcy declaration gets rid of all debts (except some taxes and maybe alimony payments); Chapter 13 allows a borrower with a steady income to pay off bills over a 36- to 60-month period. It's a serious step for a borrower because it severely limits access to credit for years to come. Billing statement The billing statement is the monthly bill sent by a credit card issuer to the customer. It gives a summary of activity on an account, including balance, purchases, payments, credits and finance charges. Important changes to a credit card account are often included in small-print fliers that are sent with the statement. Consumer Credit Counseling Service (CCCS) CCCS is a service that offers counseling about how to work out a realistic budget and debt repayment plan and work with creditors. The goal is to ensure that debts are paid back over time. Interest rate The interest rate is the fee charged form money lent. Under the Truth in Lending Act, it must be disclosed as an APR to credit card users on the card application form. Joint credit Issued to a couple based on both of their assets, incomes and credit reports. It generally results in a higher credit limit, but makes both parties responsible for repaying the debt. National Foundation for Consumer Credit (NFCC) NFCC is a non-profit organization that educates consumers about using credit wisely. The NFCC is the parent group for Consumer Credit Counseling Service. MasterCard MasterCard, a product of MasterCard International, is distributed by issuing financial institutions around the world. Card holders borrow money against a credit line and pay it back with interest if the balance is carried over from month to month. Its products are issued by 23,000 financial institutions in 220 countries and territories. In 1998, it had almost 700 million cards in circulation, whose users spent $650 billion in more than 16.2 million locations. Late payment fee Charge to customer whose monthly payment has not been received as of the due date or stated deadline for payment as shown on the billing statement. This fee can be stated in terms of a flat per-transaction fee or a percentage of the amount of the cash advance. Over-the-limit fee A fee charged for exceeding the credit limit on the card. Pay-down program Steps for paying down a credit card balance. First, stop charging on the card and make the normal monthly minimum payment by the due date. Then, two weeks later, send half the amount again, and two weeks later, half again. Repeat the half payments on the two-week schedule until the balance is paid. Penalty rate Rate Several percentage points higher than a card's current annual percentage rate, which goes into effect after two late payments. On some cards, a single late payment triggers a penalty rate. Prime rate Prime is the interest rate a bank charges to its best or "prime" customers. Each bank will quote a prime lending rate. Many institutions quote prime rates established by large money center commercial banks such as Citibank or Chase Manhattan. There is also a prime rate average listed in the Wall Street Journal that is an average of the largest commercial banks. The rate given to consumers on their credit cards is often based as the prime rate plus a certain percentage that represents the lender's assessment of the risk in lending plus its profit margin. Revolving line of credit This is an agreement to lend a specific amount to a borrower, and to allow that amount to be borrowed again once it has been repaid. Most credit cards offer revolving credit. Titanium card A titanium card has an even higher limit than a platinum card. VISA VISA cards, a product of VISA USA, are distributed by financial institutions around the world. A VISA card holder borrows money against a credit line and repays those funds with interest if the balance is carried over from month to month in a revolving line of credit. Nearly 600 million cards carry one of the Visa brands, and more than 14 million locations accept Visa cards. Zero balance A zero balance shows on a credit card customer's bill when the outstanding balance has been paid and no new charges have been incurred during the billing cycle. Warning signs These are the signals that credit bureaus look for in credit card customers' credit reports. They include frequent late payments, over-the-limit fees, and frequent balance transfers. Liability Liability refers to the responsibility of the borrower for charges to an account. Generally, a cardholder agrees to be liable for any charges to his or her account, including purchases, fees and finance charges. If the cardholder allows someone else to make charges to his or her account (through, for example, an additional card), the cardholder is still responsible for paying the bill. Two people who apply for a card together may both be responsible for the entire balance. Your liability is described in the cardholder agreement you receive from the issuer. "Credit Terminology" All credit report news
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