Understanding the terms of your credit card
November 14, 2023 8 min read
When it comes to your credit card, how well do you know your account’s terms and conditions? What about what happens if you miss a payment, or how your minimum payment is calculated? And are you making the most of your card’s rewards?
Understanding these and other key credit card terms and concepts can help you better manage your account—and know what you need to do to build or maintain good credit scores.
- Learning common credit card terminology and concepts can help to build your basic understanding of how your credit cards work.
- Being aware of your card’s annual percentage rate (APR), potential fees and transaction charges can help you understand the costs of using a credit card.
- Understanding how to earn and redeem credit card rewards, like cash back or travel miles, can help you get the most out of your card.
Basic credit card terminology: 4 phrases you should know
To get a clearer understanding of how the terms and conditions of your credit card might affect you, it can help to start by familiarizing yourself with these common terms:
1. Credit limit
A credit limit is the maximum amount your credit card issuer typically allows you to charge on your credit card. And, in general, it’s best to stay well below your credit limit if you can. The Consumer Financial Protection Bureau recommends using less than 30% of your total credit limit across all your accounts. Doing this could help your credit scores over time. And keep in mind that your limit may be increased after you’ve had the card a while and shown that you’re responsible for paying your bill.
2. Minimum payment
The minimum payment is the smallest amount you can pay by the due date and still meet the terms of your card agreement. Paying at least the minimum each month is one way to avoid late fees and other penalties. But keep in mind you’ll probably still be charged interest unless you pay off your full balance each month or are still within a promotional APR period that has no interest.
3. Cash advance
4. Grace period
A grace period lets you avoid finance charges if you pay your balance in full on or before the date your bill is due. A grace period isn’t an extension of your payment due date.
A closer look at your credit card terms and conditions
As you dig deeper into your credit card agreement, here’s a closer look at some other terms to know.
A credit card balance is the total amount of money you owe on your line of credit. If you carry a balance on your card, it’s important to know that it will cost you in finance charges. The two most common ways card issuers calculate finance charges are by using:
- Average daily balance: In this commonly used method, your issuer might track your balance day by day, adding charges and subtracting payments as they occur. At the end of the billing period, the resulting daily balances are added together. Then the total is divided by the number of days in the billing period to get the average daily balance.
- Adjusted balance: To figure the balance due, your issuer might subtract payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the current billing period aren’t included in the adjusted balance. This method gives you until the end of the billing period to pay your balance and avoid the interest charges.
Annual percentage rate (APR)
APR is the finance charge or interest rate you pay on purchases when you carry a balance on your credit card. It’s calculated as a yearly rate, so if you want to know what percentage you would pay each month in interest, divide the APR by 12 months. For example, if you have an APR of 24%, the monthly finance charge would be 2%.
It’s also important to take note of whether APR is a fixed or variable rate. Most credit cards have variable rates, which means interest rates are tied to an index, such as the prime rate. A non-variable APR is more predictable. But it can be increased by the issuer after you’ve had your credit card for one full year.
And keep in mind that APR can change based on the type of transaction. For example, cash advances often have a higher rate than everyday purchases. And some credit cards might offer introductory or promotional interest rates for things like balance transfers or new accounts.
An introductory rate is a temporary interest rate that’s lower for a designated period of time. While your interest rate may go up after the introductory rate expires, the initial lower rate may give you the opportunity to pay down debt faster. You may also be able to make larger purchases with lower interest during the introductory period.
But make sure you find out what the standard interest rate will become once the introductory rate expires. Once that period ends, the standard rate will apply to any new or existing revolving balances.
In addition to interest payments and other finance charges, you’ll probably have some fees associated with your credit card. The most common credit card fees include:
- Annual fees: Not all cards have an annual fee. But for those that do—often rewards cards—the issuer may bill your account each year for the credit card. But by taking full advantage of perks and rewards, you may be able to offset the cost of an annual fee.
- Balance transfer fees: When you transfer an existing balance from one credit card to another, there may be a fee. It’s calculated either as a percentage of the balance being transferred or as a flat fee.
- Cash advance fees: Some issuers charge cash advance fees, either as a percentage of the advance or a flat fee.
- Foreign exchange fees: Traveling abroad? Check to see if any purchases you make outside the U.S. come with this fee, also referred to as a foreign transaction fee.
- Late payment fees: Missing a payment due date might result in a late fee.
- Over-the-limit fees: If you exceed your credit limit, some issuers might charge a fee. But Capital One doesn’t. View important rates and disclosures. And many Capital One cardholders may be able to exceed their credit limits. If your account has access, you can sign in and use the Confirm Purchasing Power tool to check whether an over-limit purchase may be approved. You can also disable the ability to spend over your credit limit in your overlimit preferences
- Returned payment fees: If you pay your bill with a check that bounces, your card issuer may charge you a returned payment fee.
Rewards cards let you earn rewards when you make purchases on your card. Depending on the type of card, rewards can be used toward different benefits like travel, gift cards and cash back. If you’re comparing cards, it can be helpful to look for rewards that are:
- Flexible: It may be worth considering a card with rewards options that can be used in a variety of ways.
- Easily earned and redeemed: You don’t want restrictions that make it difficult to earn rewards or use what you’ve earned.
- Not limited by expiration dates or caps: You may also want to avoid rewards cards that have limits on how much you can earn—or cards with rewards that expire if they’re not used within a certain time frame.
- Worth the added costs: When choosing a rewards card, it may be worth exploring whether the value of the rewards you might earn outweighs any fees associated with the card.
How to compare credit card terms
Comparing cards based on their terms and conditions can be helpful if you’re considering applying for a new card. It may also be worth considering which type of card would best serve your financial goals.
If you’re looking to build flexibility into your finances, for example, you may consider finding a card with a lower APR—or a 0% introductory rate to help you save on interest. Or if you’re looking to cash in on rewards, it may be worth choosing a card with the benefits that best align with your lifestyle.
No matter which type of card you choose, it’s a good idea to use the card strategically and responsibly.
Credit card terms in a nutshell
Knowing some common credit card terms can help you better understand your credit card. And if you’re looking for a new card, learning key terms can help you decide what best fits your needs and budget.