The average American has 4 credit cards, with an average balance of around $6,194, according to Experian. That may sound undesirable, but here at Wealthtender, we don’t believe that credit cards are a negative thing per se. In fact there are some great ways to use them (as well as some not-so great ways, of course).
The problem sometimes comes from people simply not understanding common terms that credit card companies use. Which means they don’t understand how to effectively manage card payments. Here are a few common terms you might see on your credit card statement, or in your T&Cs, and a quick explanation of what they actually mean.
This means Annual Percentage Rate, and is the rate of interest you’ll pay on the money you borrow via your credit card. The APR on credit cards is high, typically anywhere from 15% to 24% or even more. What’s more, APR can be complicated because you may pay a different rate on different types of transactions. For example, you might pay more for cash advances, than on outright purchases. Always know your APR, and be aware that, with a few exceptions, it tends to be high on credit cards. This is why you ideally should not carry debt on your credit cards, and if you do, you should prioritize paying it off.
This is simply the date your next payment is due, and is possibly one of the most important pieces of information on your statement. You need to make at least a minimum payment by this date to avoid a charge for late payment. Missing your payment can also result in a higher APR and/or a lower credit score.
This is the time between when you make your purchase and your due date, and is usually interest-free. Yes, you can get at least 21 days, and often more, interest-free credit using a credit card. But check your T&Cs. You may forfeit your interest-free grace period if you carry a balance on your credit card. This is one of many reasons why the ideal way to use a credit card is to only put things on it that you can pay off by the end of the month, or whenever that due date rolls around.
This is the most you can spend on your credit card, altogether (including of course any balance from previous months you haven’t paid off yet). You need to keep a close eye on this, as if you hit your limit, one of two things will happen. Either your card will be refused or the transaction will go through and you’ll be charged a (steep) over-limit fee. Again, check your T&Cs to find out which. You may even have an option to choose, but the way to avoid this is to simply track your credit card spending, be aware of your limit, and never go over it.
Your minimum payment is the smallest amount that you can pay on your due date. It will change each month, as it’s calculated according to the size of your balance. Generally it’s around 1% – 3% of any outstanding balance you have that month. When my highly responsible father helped me get my first credit card at 18, he didn’t even point out the minimum payment option. He simply told me to never put more on my credit card than I could afford to pay off. I’m pretty sure I used that credit card for over a year, before I even noticed there was a minimum payment, and that’s how I’ve used credit cards ever since.
Many people, however, only ever make the minimum payment each month, which is a very bad thing. Debt will mount up very quickly if you do that, and it’s expensive debt. Always make either the full payment, or the absolute maximum you can afford. If you regularly find you can only afford to make minimum payments, that’s one of a few signs that you’re carrying too much debt and need to reassess your finances.
Late Payment Fee
This is what it sounds like: a fee charged for paying your credit card bill late. It will apply in full as soon as you miss the deadline (which is generally 5 pm on the due date, although some card companies may allow online payments up to midnight on the due date). The fee will usually be calculated based on the size of your balance. Continually missing your payment date will result in your card being subject to a higher APR, and will impact your credit score.
This is the fee the credit card company charge you for owning the card, and can vary greatly, from around $25 up to $500. The fee will be higher on cards with more features and benefits to the consumer, so again check the T&Cs to make sure you’re happy with your card’s features. Sometimes a card company will waive the annual fee to entice new customers, but that doesn’t mean they won’t charge the fee in subsequent years, so it’s still important to check what it is.
Understanding these basic credit card terms is vital, and will help you manage your card payments and purchases better, hopefully keeping any credit card debt under control. Remember, the best way to use a credit card is for convenience, not borrowing. If you can pay off your balance on your due date each month, that’s your ideal scenario.