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Credit cards can be a great asset when used responsibly, but like so many other financial products, it's easy to be overwhelmed by all the related jargon.
APR, balance transfer, prime rate — it can sometimes feel like card issuers make things unnecessarily complicated. But a little bit of research can go a long way in helping you feel more comfortable with the benefits and limitations of your credit card.
Below, CNBC Select breaks down the most common credit-related terms, so you can better understand how your card works and avoid the pitfalls (and high costs) that can come when you don't use your card properly.
The yearly fee charged for holding a credit card. Some cards may waive the annual fee for the first year.
Usually referred to as APR, the annual percentage rate is the interest rate you are charged if you don't pay off your credit card balance in full each billing cycle. Many credit cards have a range of APRs: balance-transfer APR, purchase APR, introductory APR, variable APR (defined below). When you sign up for a credit card, it's important to know the various APRs, since it can have a big impact on how much you owe if you carry a balance month to month.
To find your monthly interest rate, simply divide by 12. For example, if you have a 24.99% APR, divide by 12 to get 2.0825% as your monthly interest rate.
A balance is the amount of money you owe on your credit card bill. It can change from month to month depending on whether you pay your bill in full and on time. The balance includes any charges you make, along with accrued interest, late payments, foreign transaction fees, annual fees, cash advances and balance transfers.
A balance transfer is when you take debt from one credit card and move it to a new card with an introductory 0% APR for a set time period, usually six to 21 months. Balance transfers provide you with more time to pay off debt and can save you hundreds of dollars on interest charges. Take note that balances can't be transferred between cards from the same bank. (Looking to make a balance transfer? Check out CNBC Select's roundup of the best balance transfer cards.)
This is the interest rate applied to balance transfers and may be greater than the purchase APR. This APR may be variable or fixed.
When you transfer debt from one credit card to another, you'll often incur a 3% to 5% fee per transfer. Cards may also set $5 or $10 minimum fees.
A billing cycle is the amount of time between the last statement closing date and the next. Billing cycles must be at least 21 days, according to the CARD Act.
When you withdraw money from your credit card account, it's known as a cash advance. Card issuers typically limit the amount of money you can withdraw to a portion of your total credit limit and charge high interest rates and fees on the withdrawal, making cash advances costly.
The interest rate you incur if you take out a cash advance. This rate is often one of the highest APRs you can be charged. Cash advances incur interest immediately, with no grace period.
When you take out a cash advance, you typically incur a fee: 5% or $10 per advance, whichever is greater.
A credit bureau is an agency that aggregates information about your credit history and reports it to financial institutions and other parties, such as real estate and auto companies. The three main credit bureaus are Experian, Equifax and TransUnion.
A credit limit is the maximum amount of money that can be charged to a credit card. Credit limit may also be known as a line of credit, credit line or spending limit.
A credit report is an aggregation of your credit history. Credit reports include detailed information on credit accounts, such as payment history, balances, account opening date and more. The information from a credit report is summed up in a credit score. (Here's how to get a free credit report.)
A credit score is a three-digit number that represents your creditworthiness. The most common type of credit score is a FICO Score, and scores range from 300 to 850. The higher the credit score, the better. (Read more about how to check your credit score for free.)
Also known as your credit utilization ratio, or CUR, this number is the amount of credit you're using compared to the amount of credit you have available. So if you have an $800 credit card balance and you have a $2,000 credit card balance, your CUR is 40%:
($800 / $2,000 = 0.4 X 100 = 40%)
Experts recommend keeping your utilization rate below 30%.
A fixed APR does not change with the prime rate. Card issuers can still change your APR, though they need to notify you prior.
An additional fee charged for making purchases outside the U.S., typically 3% per transaction. Check out our picks for the best credit cards with no foreign transaction fees.
A grace period is the amount of time between the end of a billing cycle and when your bill is due. During a grace period, you typically won't be charged interest on your balance. Grace periods vary by issuer, but must be a minimum of 21 days from the end of a billing cycle. Beware that grace periods don't apply to cash advances or balance transfers.
Many credit cards offer introductory APRs that can charge cardholders no interest for a set length of time (usually 12 to 18 months, but up to 21 months). During the intro 0% APR period, you may benefit from no interest on new purchases, balance transfers or both. These offers are a great way to save on interest charges and get out of debt. (Click here for more information on balance transfers.)
If you pay your credit card bill late, you'll incur a fee of up to $29 for first-time instances and up to $40 for subsequent violations made within six billing cycles. Find out more about late or missed credit card payments.
A minimum payment is the smallest amount of money you have to pay each month to keep your account current. While issuers calculate minimum payments differently, many set a minimum or "floor" — most commonly $25, according to the Consumer Financial Protection Bureau — which is the lowest payment you'll be charged. Minimum payments can also be a percentage of your current balance.
Card issuers may penalize you with an interest rate, known as a penalty APR, that's higher than your regular APR when you pay late.
The prime rate, or prime lending rate, is the best interest rate lenders charge consumers. The actual interest rate for your credit card may be above the prime rate. If the prime rate changes, often so will your variable APR. So if the prime rate increases, odds are your variable APR will increase too and vice versa.
Purchase APR is the interest rate charged on new purchases and may be variable or fixed.
A variable APR fluctuates with the prime rate and can go up or down at anytime. If the prime rate increases, so may your variable APR. If the prime rate decreases, your APR may also decrease.
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