Credit cards, like most financial products, can be difficult to understand, thanks to the jargon used by card companies. Do you want to understand credit card jargon, work out what charges you are paying on your credit card and find out how to pick the best credit card for you?
We have put together a handy glossary of credit card terms to explain credit cards terms, phrases and wording. Read on to understand what an APR is, how to work out how much you are paying in credit card fees, and find out what credit card interest rate you are paying.
Some credit cards will come with an annual fee, which you pay in order to use the card. This fee is separate from any interest you might end up paying. You will be charged the fee once a year. It will appear on your credit card statement.
The Annual Percentage Rate is the total "cost of borrowing” over the course of 12 months. For example, if your APR is 20%, you will be charged this rate over the course of 12 months on your outstanding balance. However, if you pay your monthly bill in full and on time, you will not pay any interest.
Sometimes known as credit builder cards, bad credit credit cards are designed for people with poor or limited credit histories. By using them and repaying the balance, bad credit credit card customers can potentially improve their credit rating.
Bad credit credit cards are more likely to accept people with poor credit histories but the APR will generally be much higher than most credit cards. This is because bad credit card users are a higher risk to credit card companies so they offset that higher risk of defaulting on payments by charging more. Again, if you pay the monthly statement off in full each month, you pay no interest.
This is confusing as there are two different types of balance, the statement balance and the credit card balance. The statement balance is how much you need to pay each month (showing on the monthly statement) to pay no interest. The credit card balance is the total money you owe your credit card provider, which is the amount on the statement pls any spending since then.
The credit card balance can sometimes be referred to as your credit card debt. This will include the amount shown on your bill for that month plus any subsequent purchases that are still on their 0% interest period.
If you already have a credit card and haven’t yet paid off the balance, you could shift that debt to a balance transfer credit card. These credit cards usually have a lengthy period where you can pay off the debt at 0% interest or a relatively lower APR than usual.
The transfer itself has an initial fee of around 1% to 3% of the debt, but then you can leave it on your new card and pay it off over a longer period without worrying about it accumulating further interest. The card will charge you interest at the usual rate if you purchase anything new on the card, unless it also has an introductory offer on purchases.
Some credit cards offer cash in return for your spending. When you spend money anywhere or at selected retailers (depending on the offer), you get a percentage of the cost paid back to you in cash.
Cashback credit cards usually come with a higher than usual cashback rate in an introductory offer. You could take advantage of this one-off deal by applying for the card before you plan to make some big purchases.
However, the cashback rate usually falls lower once the introductory offer period is over. It's also worth noting that the APR on cashback credit cards is higher than other standard credit cards, as they are usually aimed at people who can afford to pay back the balance in full and on time.
Withdrawing cash with your credit card can be expensive. In contrast to withdrawing money with a debit card, credit card cash withdrawal attracts a fee.
Credit card providers usually add a 3% fee for withdrawing cash and then begin charging you interest straight away and every day until the credit is paid back in full.
Charge cards are not credit cards, as they are technically not allowing you to borrow any money. You can spend money on a charge card but you must pay it back at the end of the month and in full. As a result, there is no interest charged either.
So what’s the point of charge cards? Charge cards often come with special deals and rewards that you can’t get on most credit cards. People who use them usually have high incomes and intend to make big purchases on a regular basis, so it’s an opportunity for them to do so and collect rewards in the process. American Express is the most popular provider of charge cards.
Contactless credit and debit cards use the contactless technology, which allows customers to pay for goods and services for £100 or under by simply holding their credit or debit card close to or against the card payment reader.
There’s no chip and pin required or signature. Many shops and retailers require you to pay by contactless card, rather than cash for public health reasons and because they do not want to handle cash. All new debit and credit cards are issued with the technology for them to be used as contactless cards.
The contactless limit was originally £30 and then was raised to £45 and then £100. The reason for having a limit is that should the card be stolen, it cannot be used fraudulently for very large purchases.
If you have a contactless credit card or debit card you may find that you are asked to put in your PIN number after every five or so transactions that you make. This is a security measure to ensure that you are in possession of the card and that it is not being used fraudulently.
Learn more about Apple Pay contactless payment in our guide.
A credit builder credit card is sometimes referred to as a bad credit credit card. They are essentially the same thing. The providers marketing their credit cards as a ‘credit builder’ credit card are looking for someone with a limited credit history, not necessarily someone who has a history of missed payments or bankruptcy.
Your credit limit is how much you are allowed to spend on your credit card. Higher credit limits are awarded to customers with good credit scores and customers who prove they can pay off their balance regularly.
Once you've reached your credit limit you need to make a payment to bring down the balance before you can use it again.
Customers with poor credit scores are likely to get lower credit limits if they are approved for a credit card.
Using up all, or even most, of your credit limit can negatively affect your credit score as it shows potential lenders that you are desperately in need of credit and may be susceptible to missing payments.
A credit report shows you what potential lenders see when they look into your financial history. They use this information to decide whether to approve your application for a credit card, mortgage, loan, or even a mobile phone contract. Find out more about credit reports here.
You can request a copy of your credit report to ensure that there are no mistakes on your credit file which might be affecting the success of your applications for credit.
Your credit score is a number attributed to your credit report based on various factors.
Each credit reference agency has its own method of calculating this and credit providers consider a number of other factors before approving your application. Your credit score is a good predictor of whether you are likely to be approved for different forms of credit including credit cards, broadband or TV contracts. The better your credit score, the more favourably you will be viewed by companies or credit card providers.
If you miss a few payments, roughly 3 to 6, your credit card provider will send you a default notice, giving you at least 14 days to pay the amount stated on the notice.
Court action could be used to recover the debt and if you fail to make the payment your account will be ‘defaulted’, meaning you won’t be able to use your credit card any more – although the credit card provider might have already blocked all spending on your account after the first couple of payments missed.
A record of the default will also stay on your credit report for six years, making it harder to get any form of credit throughout this time. It is really important to avoid defaulting on your payments. If you find you are struggling financially then talk to your credit card company who may be able to freeze interest or give you more time to pay back the money you owe. Always make sure you pay back the minimum amount on your credit card each month to avoid fees and charges that come with missed payments.
If you set up a Direct Debit on your credit card account you will be instructing and giving permission to your credit card provider to take the stated payment from your account each month. You can normally set this to the minimum amount due, a fixed amount, or the full balance.
Every credit card has minimum eligibility criteria, to help customers understand if they should not proceed with the application. However, meeting the minimum eligibility criteria is not a guarantee of approval. Eligibility criteria include factors such as age, salary and sometimes other details, depending on the credit card.
If you purchase something abroad or make a transaction in a foreign currency over the Internet, you are likely to incur a foreign transaction fee on your debit or credit card.
These are usually between 2-3% of the total charge. Some credit cards come with 0% foreign transaction fees and are designed for use abroad. However, just like all other credit cards, cash withdrawals at home or abroad are likely to still incur an additional cost.
It's worth noting that even the 0% foreign transaction fee credit cards do not represent a perfect exchange rate between currencies. The exchange will be based on MasterCard or Visa currency rates (depending on who issues your credit card), but you won't be charged an extra surcharge.
Interest free credit is a time-limited deal that allows you to either transfer a balance or purchase an item without paying any interest – although you'll still have to continue making regularly monthly payments as usual.
Credit card providers will never give you interest free credit for life so always check how long the interest free credit period is before applying.
Many credit cards include an introductory offer, be it bonus reward points, extra cashback, 0% on balance transfers or 0% on purchases. All introductory offers are used to entice new customers, but they run out and revert to the standard offer or rate. Once the introductory rate has ended, check out whether you are still getting the best deal or whether you need to switch to a different credit card.
If you find a credit card being advertised as having ‘low APR’, this means that the card’s main feature is its rate of interest, rather than any special offers.
Some credit cards are designed for every day use and have no other specific purpose, unlike, say, a balance transfer credit card, which comes with 0% interest on balances transferred. A low APR credit card will charge a relatively lower than normal interest rate for the foreseeable future, rather than for a limited period. If you only pay off the minimum amount each month then having a card with a low APR could save you money compared to a credit card with a high APR interest rate.
Every credit card has a minimum monthly repayment amount set out in its rules, which you can find in the summary box before applying. This is usually a percentage of the total amount or a relatively small sum, plus any interest charged or default penalty payments.
Generally if you pay the minimum monthly repayment you will have to pay off your balance over a longer period, thus incurring more interest charges, so if possible, it is best to pay all the balance due or at least a higher amount than the minimum monthly repayment amount.
Your credit card bill will usually state the "minimum amount due" each month, which you will have to pay. Make sure you pay off this amount, even if you cannot clear the full balance.
A credit card money transfer is similar to a standard balance transfer, except you can use your credit card to help pay off your current account overdraft debt. A balance transfer can only be used to pay off the debt on another credit card, whereas a money transfer can cover your current account debt too.
In order to get certain introductory offers on a credit card, you usually need to be a ‘new customer’. If you have had the same credit card for a certain amount of time, you might be able to move to a new credit card from the same provider and get the new customer benefits.
It all depends on each credit card provider’s rules. However, with transferring a balance, you will only able to switch from one credit card provider to another, and not between two cards with the same provider.
If you are planning a big purchase you can use a 0% purchase credit card to pay off your spending in smaller monthly instalments and avoid paying any interest on it for a relatively long period.
In essence, purchase credit cards have a longer than usual interest-free period on purchases, but many of them also offer introductory offers on balance transfers too.
There are various rewards you can get with a credit card. From loyalty points at selected retailers or Avios points to spend on flights and holidays, you can find a credit card with rewards.
Rewards can include cashback, points to redeem at the supermarket, hotels or airlines, among others, so it's worth shopping around the market to see if any of the credit cards can reward your day to day spending. Many of these are linked to travel perks, and so can be useful if you have to travel and fly abroad for work.
All credit cards have a credit card summary box, which explains all of the interest charges and features of the credit card.
The details are not always easy to understand, but they have a uniform standard to make comparison simpler. Learn more about the credit card summary box here.
If you take out a balance transfer credit card and wish to transfer you debt, you will need to pay a balance transfer fee.
This is usually 1-3% of the total amount you intend to transfer. Some credit cards will refund you a portion of the fee if you make all of your payments on time.