Credit Card Terms Glossary

Posted on January 27, 2012 by Max

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Glossary of Important Credit Term Definitions

In order to know what you are talking about, and more importantly to determine what is the best credit card offering being made in any of are comparisons it is vital to have a firm grasp of the financial terms being thrown around. The industry specific phrases that are used by banks may not be familiar to you at first, but you can use this glossary as a reference if and when you need a definition.

Credit Limit
The credit limit is the amount you have been approved to borrow from a given credit line. In the case of credit cards, you will be assigned a credit limit as a function of your credit score, disposable income, and outstanding balances. The greater your financial capability, coupled with how clean your credit history is, will determine at what dollar amount your credit limit will be set. It is important to be aware, it is possible to spend more than your credit limit in some cases resulting from credit card processing delays, penalty fees, or overdraft protection agreements. In most cases your ability to make additional purchases will be stopped upon hitting the upper limit of your credit, but you must check your card program details closely to be sure as policy varies widely.

In addition, there are exclusive credit card programs that allow for limitless or no limit credit lines. In such cases it is typical that the balance is required to be paid off monthly, or in some very exclusive cases, they behave as normal credit cards, simply with no set spending limitation.

Balance Transfer Fee
Balance transfer fees are encountered when you are moving a balance of debt from one lender to another. In the case of credit card balance transfers you are typically charged promotional APR in order to incentive your moving your balances from one bank to another. In addition to the adjusted APR, lenders can charge a one time transfer fee levied at the time of transfer, customarily a % of the amount transferred but not to exceed a certain amount. The CARD Act removed the cap previously in place for such balance transfer fees, that had limited them to $75, now the fee is unlimited so read the transfer terms carefully before you proceed.

Interest Rates
An interest rate is the rate or speed at which cost or interest is incurred and must be paid by a borrower to a lender. Interest rates are set by the lender of capital and represent the profit or incentive to the lender for incurring the risk of providing credit. With regard to credit cards, the card providers typically charge an interest rate that is some percentage in addition to the prime lending rate set for banks, typically 300 basis points above the federal funds rate in the U.S.

Loan Modification
A loan modification is any type of re-negotiation of the terms of a financial instrument. Most commonly loan modifications are encountered in the home mortgage industry due to hardship. Consumers can contact the loan provider declare their inability to meet the agreement as it stands and work to negotiate an alternative in lieu of default or foreclosure. Though this is by far the most commonly seen loan modification, the situation need not be so dire for the possibility to exist. A simple call to your credit card provider asking to increase your credit line and or reduce your APR, if successful would also be an example of a loan modification.

Fixed APR
An APR is an acronym for annual percentage rate that is the metric that represents the total cost of loaned monies borrowed. Unlike the interest rate the APR of a loan includes closing costs, fees, points and other charges that are incurred. The APR is sometimes referred to as the ‘real’ interest rate because of its more accurate accounting of borrowing costs. A fixed APR refers to a set annual percentage rate that does not adjust with time or market conditions, commonly referred to as ‘locked in’.
Credit cards typically provide their APR rates when comparing programs.

Billing Cycle
Your billing cycle is simply the amount of time set between being billed for the services being provided. In the case of credit cards it is the amount of time that is set before you are charged your accrued interest fees and minimum payment becomes due. The cycle is used in calculations of your accrued interest based on how long you held the balances you did and at what amounts. Failing to meet your billing cycle payment deadlines with credit cards can result in levied penalties, fees, and a decreasing credit score.

Credit Bureaus
The credit bureaus most commonly referred to as the big three are: Experian, TransUnion and Equifax. These are financial history data registries that keep track of your financial profile and create a risk assessment score based on the details of your report known as the credit score. The exact formulas that determine credit scores for the three bureaus are a closely guarded secret, but you can rest assured they rely on common sense metrics of what determines a good financial risk to a lender vs. a bad financial risk. If you set upon a policy of reducing your debts, increasing your income and creating a long history of on time paid obligations you will undoubtedly experience improved credit scores.

Unsecured Credit Lines
Unsecured credit lines refer to any financial instrument that allows for your borrowing without requiring an asset placed in security. Essentially unsecured loans are being extended to the borrow on his or her honor / reputation. Unsecured borrowers typically have excellent credit scores with a long history of meeting their obligations, and more importantly have positive debt to income ratios (meaning lots of income, not much borrowed making it repayment relatively easy). Lenders of unsecured credit lines are not without repayment recourse in the case of the borrowers default, but the process begins with a tarnishing of the borrowers credit score rather than pursuit of pledged assets.

Secured Credit Lines
As opposed to unsecured borrowing, secured credit lines are extensions of money to a borrower that require the pledging of an asset as security for repayment. Security can take many forms ranging from a per-deposit of sums of money that sit in an escrow of sorts until repayment is met to borrowing against the ownership of an automobile or piece of real estate. A home mortgage is the most common example of a secured credit line, that in this case is used in payment for the house. Upon default the lender has legal recourse to secure the property in lieu of repayment, with real estate more commonly referred to as a foreclosure.
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