Annual percentage rate (APR)
The annual percentage rate (APR) is the interest rate charged on credit card balances expressed in a standardized, annualized way. This rate is applied each month that an outstanding balance is present.
An authorized user is person who has permission to use a credit card account, but is not responsible for paying the bill. It differs from joint credit, in which both parties are obliged to pay.
Available credit is the amount that is available to be charged to a credit card amount; the difference between the credit limit and outstanding charges on the account.
A term used to describe a poor credit history. Actions that damage credit is late payments, missed payments, maxing out credit accounts, foreclosure, bankruptcy, repossession, charge-offs.
A balance transfer occurs when the outstanding balance of one credit card (or several credit cards) is moved to another credit card account. Balance transfers usually have fees.
Balance-to-limit ratio is used in calculating credit scores. It compares the credit balance (the amount of credit being used) to the total available credit limit of the account holder.
Bankruptcy is a legal assistance to consumers when bills cannot be paid. There are different types of bankruptcies for consumers; one is Chapter 7 bankruptcy where the debts are discharged. The other is Chapter 13 bankruptcy where debts are restructured and repaid over three to five years, under bankruptcy court supervision.
Business credit card
A business credit card is used by corporate executives, business owners or entrepreneurs to separate business expenses from personal charges. Learn how to establish business credit.
Charge-offs occur when account holders cease payment on an account and the creditor stops trying to collect the debt after it is 180 days past due. A charge-off is an accounting practice which moves the account off the books; changing it from an asset to a liability. One charge-off can drop a credit score by as much as 100 points. Learn how to dispute a charge-off.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau, or CFPB, is a new federal watchdog agency charged with regulating consumer financial products, such as credit cards, mortgages and student loans.
Card Holder Agreement
A credit inquiry is created when a lender pulls a consumer’s credit record. A credit inquiry can be hard or soft. Hard credit inquiries can take up to 10 points away from your credit score while soft inquiries do not affect your credit score.
Credit mix is one of the five factors used in determining a credit score. Having a broad credit mix is good for your score this would include revolving credit which are credit cards and installment loans such as a mortgage or car loan.
A credit report is a compilation of accounts, loans, payment habits, public records and credit inquiries maintained by one or more of the credit bureaus.
A credit score is a three digit number calculated by the information contained in a consumer’s credit report. It is a summary of how well a consumer manages debt. The higher the number, the better. There are a variety of credit scores using different scoring formulas, all of which judge risk of default.
Debt management plan (DMP)
A debt management plan (DMP) is a formal agreement between a debtor, a credit counseling firm and creditors wherein the debtor agrees to make a single payment to the counseling firm. The payment is distributed among creditors on an agreed-upon schedule.
A debt-to-limit ratio is used in the calculation of credit scores. Much like the balance-to-limit ratio, it compares the amount of credit being used to the total credit available to the borrower. Consumers should aim for a low ratio as it will improve credit scores.
Fair and Accurate Credit Transactions Act
The Fair and Accurate Credit Transactions Act of 2003 is a federal law that established consumers’ rights to obtain their credit reports from credit bureaus, free, once a year. The act led to the establishment of the website, www.annualcreditreports.com, that provides the access to the three major credit bureaus.
Fair Credit Billing Act
The Fair Credit Billing Act is a federal law enacted to protect consumers from unfair billing practices, such as unauthorized charges, charges for unaccepted or undelivered goods and services and other disputed charges. Among its most important consumer protections: Your maximum liability under federal law for unauthorized use of your credit card is $50. If you report the loss before your credit cards are used, the act says the card issuer cannot hold you responsible for any unauthorized charges. The law applies to revolving charge accounts and open-end credit accounts, such as credit cards. To dispute a charge, send the creditor your name, address, account number and a description of the billing error to the address given for “billing inquiries.” The creditor must receive the letter within 60 days of sending the flawed bill and must acknowledge your complaint in writing within 30 days after receiving it. The dispute must be solved within two billing cycles, but no more than 90 days.
Fair Credit Reporting Act
The Fair Credit Reporting Act was enacted to govern how credit bureaus maintain, share and correct information in credit reports. It sets out, for example, a method by which consumers can force inaccurate information to be removed from credit files. A 2003 amendment to the act granted consumers the right to get a free copy of their credit reports yearly from each of the three major credit bureaus.
A FICO score is a particular type of credit score — one offered by FICO, the company that pioneered their use. Like other credit scores, a FICO score is a three- digit numeric value that assesses a borrower’s credit risk. Your FICO score can range from 300 to 850. The higher the number, the more likely the loan is to be repaid. People with low FICO scores get charged higher interest rates to make up for the added risk. People with high FICO scores get the best deals. FICO scores are calculated using complex formulas that predict future debt repayment behavior. Income, credit lines outstanding, debt to income ratio, mix of credit and past payment behavior all factor into a person’s FICO score.
An installment loan is a loan in which equal, periodic payments are made for a defined period of time. A typical car loan is an example of an installment loan: You pay the same amount each month, with part going toward interest and part going toward principal, until the loan is paid off.
Late payment fee
A late payment fee (a late charge) is charged to a borrower who misses paying at least their minimum payment by the payment deadline. In order to avoid late fees, ensure that you pay at least the minimum amount by the due date. Late payments may affect your credit history negatively, even if your entire outstanding balance is later paid in full.
MasterCard is a global bank card payment transaction processor, whose portfolio of brands and products include Maestro, Cirrus and MasterCard PayPass. It partners with financial institutions that issue credit cards, and with merchants who accept those cards. MasterCard offers a network of more than 28 million acceptance locations around the world and, in many cases, guarantees payment through its system. Through its merchant agreements, it sets payment and charge-back policies that affect consumers. It does not, however, issue cards, set annual fees, determine annual percentage rates on cards or solicit merchants to accept cards.
The minimum payment is the lowest amount of money that you are required to pay on your credit card statement each month. See your credit card “terms and conditions” document to see how your credit card’s minimum payment is calculated. Until 2004, minimum payments were commonly as low as 2 percent, which meant that any large balance could take decades to pay off, if only the minimum payment was made. Under pressure from federal banking regulators, card issuers ramped up the required minimum payment. The industry standard is now to calculate the minimum in one of two ways: either 3 percent to 5 percent of the total balance due, or, all fees and interest due that month, plus 1 percent of the principal amount owed.
Open end loan products, such as credit cards, are distinguished by closed end loans, such as mortgages and auto lans, by one key distinction. For closed end loan products, the key decisions about lending are made at the time the loan is offered. If you get an auto loan, the deal won’t change as long as you keep making payments. With open end credit card loans, however, the decision to extend a loan and on what terms is under constant scrutiny, and can change. The change can be for better or worse, depending on whether the consumer becomes a lesser or greater default risk in the eyes of the lender.
Under the Credit CARD Act of 2009, consumer gained the right to opt out of interest rate increases, fee increases and other significant changes in terms. Issuers must give 45 days’ notice of the changes and notify consumers of their opt-out rights and procedures. However, to discourage spending sprees, the law also calls for the new interest rate to apply to new purchases after 14 days. Consumers who opt out have a minimum of five years to pay off their existing debt under the old terms.
A fee charged when your balance goes over your credit limit (also known as over the limit fee). When cardholders attempt to make purchases that will put them over their credit limit, card issuers used to routinely decline the transactions. In recent years, many card issuers changed their policies and automatically enrolled consumers in programs that allowed the transaction, but then added hefty fees. The Credit CARD Act of 2009 ended the practice of automatically enrolling consumers into over-limit fees, and requires that credit card issuers give account holders the option to opt-in to over-limit fees. Without the consumer’s consent, they cannot charge over-limit fees. The act also forbids issuers from charging a fee higher than the amount a consumer is over the limit.
Under Regulation Z, credit card issuers are required to disclose the terms and conditions to potential and existing cardholders at the point of account opening and at regular intervals. Upon soliciting and opening new credit card accounts, credit card issuers must generally disclose key information relevant to the costs of using the card, including the applicable interest rate that will be assessed on any outstanding balances and several key fees or other charges that may apply, such as the fee for making a late payment. In addition, issuers must provide consumers with an initial disclosure statement, which is usually a component of the issuer’s cardholder agreement, before the first transaction is made with a card. The agreement is the governing document for the account and provides more comprehensive information about a card’s terms and conditions than would be provided as part of the application or a solicitation letter.
The term used to describe lending where the consumer’s credit score and credit history determine their interest rates, which vary from person to person.
Secured credit cards
Secured credit cards require collateral — usually a cash deposit with the issuing institution — for approval. They are designed for people with no credit or poor credit. Some secured card marketers load these cards with high fees and unfavorable terms, taking advantage of the fact that those seeking the cards are often unsophisticated or desperate.
Subprime credit card
A credit card designed for those with little credit history or bad credit. These types of bad-credit credit cards typically carry higher fees and interest rates to offset the increased risk involved with subprime lending.
Terms and conditions
Terms and conditions is the common name for the document in which credit card issuers describe in detail their practices. After a consumer applies for a credit card and receives it in the mail, the first use of the card turns the terms and conditions into a legal contract.
“Thin file” is a term used in the credit scoring world to describe a brief credit history. Traditionally, credit bureaus would not lend to people with thin files because they displayed too little experience in handling loans. However, more credit bureaus are considering alternate data — such as the history of utility payments or rent — in making lending decisions.
Time-barred debt is a term that describes a particular type of old, unpaid debt. Every state has a statute of limitations that limits how long a creditor can get a court judgment forcing payment. For credit card debt, states’ statutes set limits of three to 10 years. Debt older than that is “time-barred debt.”
Unsecured credit cards
Unsecured credit cards are the most common type of credit cards. They are not secured by collateral. That means that unlike secured loans, such as mortgages or auto loans, unsecured credit cards are not directly connected to property that a lender can seize of the cardholder fails to pay. Issuers of unsecured cards must make use of other means — such as the courts or garnishment — to collect unpaid debts. Customers qualify for unsecured cards based on their credit history, their financial strength and their earnings potential.
Utilization ratio is used in the calculation of credit scores. It compares the amount of credit being used to the total credit available to the borrower. Having a low ratio — in other words, not much debt but a lot of available credit — is good for your credit score. Also known as a balance-to-limit ratio.
Variable interest rate
With variable-rate cards, your APR (annual percentage rate) can change. Usually, the rate is tied to another rate called an index. Also known as a floating rate. In the United States, most credit cards have variable rates, and most of them are pegged to one such index, the prime rate. The prime rate, in turn, moves in lock step with an interest rate set by the Federal Reserve called the federal funds rate. So if you see a headline that says “Fed raises interest rates” it means your cost of carrying a balance on your credit card likely just went up. In your credit card terms and conditions document, the variable rate is often stated as an index plus a margin. For example, your document might say your rate is “Index + 10.99 percent.” If the prime rate is your index and is at 4 percent, your card’s interest rate is 14.99 percent.
A card that bears the Visa symbol and which enables a Visa cardholder to obtain goods, services or cash from a Visa merchant or acquirer, and have the transaction processed through its network. Visa does not itself issue credit or debit cards, but partners with card-issuing financial institutions.
Zero liability policy
Major credit card issuers, concerned about public reactions to identity theft and fraud, have voluntarily adopted zero liability policies to product consumers. Zero liability policies go beyond the requirements of federal law, which limit individuals’ out-of-pocket expenses to $50 if a credit card is lost or stolen and then used fraudulently. As the name implies, zero liability policies mean that consumers pay nothing if their cards or account information are stolen and used fraudulently.