Credit card terms 101

When it comes to your credit card, how well do you know your account’s terms and conditions? What happens if you miss a payment? How is your minimum payment calculated? 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 your credit scores.

What you’ll learn:

• Learning common credit card terminology can help you build a basic understanding of how credit cards work.

• Being aware of your card’s APR and potential fees can help you understand the costs of using a credit card and how to avoid unnecessary charges.

• Understanding how to earn and redeem rewards, such as cash back and travel miles, can help you get the most out of your card.

To get a clearer understanding of how using a credit card could affect you, it can help to start by familiarizing yourself with these common or basic terms:

Your credit scores are numerical estimates of your creditworthiness, or how likely you are to repay what you borrow. Scores are based on factors that include:

• Payment history: This reflects how well you’ve handled your bills in the past and whether you consistently make credit card, loan and other debt payments on time.

• Credit utilization ratio: In simple terms, credit utilization is the percentage of your credit limit you’re currently using. For example, if your credit limit is $10,000 and you carry a $3,000 balance, your credit utilization ratio is 30%.

• Credit age: This reflects how long your credit accounts have been open. A longer credit history can signal stability to lenders and show that you’ve managed credit over time.

• Credit mix: How your debt varies between installment loans and revolving credit can help lenders understand the variety of credit accounts you have. Installment loans include things like mortgages, auto loans and student loans. Revolving credit includes things like credit cards and lines of credit (LOCs).

• New credit applications: Since applying for new credit can trigger a hard inquiry on your credit report, it’s important to remember that multiple inquiries in a short period may temporarily lower your score.

FICO® and VantageScore® are two common credit-scoring companies. Each has multiple scoring models that can be used to calculate scores, so people often have more than one credit score. But both companies’ most popular scores range from 300 to 850.

The information used to calculate your credit scores can be found in your credit report.

A credit report is a detailed record of your financial activity. It demonstrates how you manage credit accounts, loans and debt repayment. Typically, the report contains:

• Personal information, such as your name, Social Security number (SSN) and birth date

• Credit history, which includes accounts you’ve opened and closed, your record of on-time and late payments, accounts in collections, and how often you apply for credit

• Public records, including any bankruptcies, foreclosures and liens

• Hard and soft inquiries into your credit file

Credit card issuers, lenders and other companies can use your credit reports to determine whether to approve you for a credit card, loan, insurance policy, apartment and more.

The three major credit bureaus—Equifax®, Experian® and TransUnion®—collect, maintain and share consumer credit information with lenders, employers and landlords. They compile credit reports that are used to evaluate creditworthiness and determine eligibility.

These common terms explain how your balance is calculated and when payments are due:

A credit limit is the maximum amount your credit card issuer typically allows you to charge on your credit card. In general, it’s best to stay well below your credit limit to help keep your credit utilization down. Using less than 30% of your total available credit across all your accounts may help your credit scores over time.

Every time you use your credit card, it adds to your credit card balance or the current amount you owe your lender. That’s known as your current balance. The exact amount you owe each month depends on how much you spend during the billing cycle. It’s known as your statement balance. Both balances might include interest charges and fees.

A billing cycle, billing period or statement period is the time between your credit card statements. It’s usually about 30 days long. Your transactions during your billing cycle, plus any outstanding balance from previous cycles, make up your credit card statement, which will typically be due a few weeks later. The amount you owe at the end of each billing cycle also determines the minimum required payment on your billing statement.

The minimum payment is the smallest amount you can pay by your statement 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. Paying more than your statement balance each month is one way to avoid interest charges.

The time between the end of your billing cycle and your credit card statement due date is known as the grace period. It can help you avoid interest charges if you pay your balance in full by your bill’s due date. But a grace period isn’t an extension of your payment due date.

If you carry a balance on your card, it’s important to understand how interest works and what it may cost you.

Your APR determines how much interest is charged, but costs can also vary by transaction type—such as balance transfers or cash advances. Plus, issuers may use different methods to calculate your balance, which can affect how much interest you’re charged.

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 an annual rate, so to find the monthly interest rate, divide the APR by 12. For example, if you have an APR of 24%, the monthly finance charge would be 2%.

Most credit cards have a variable APR, which means it’s tied to an index, such as the prime rate. APR can vary by transaction type, such as higher rates for cash advances or promotional APRs for balance transfers or new accounts.

A promotional rate is a temporary interest rate that’s lower for a designated period of time. If it’s tied to a new account, it might be referred to as an introductory rate. A promotional rate may give you the opportunity to pay down debt faster or make larger purchases with smaller interest payments during the promotional period. But make sure you check what the standard rate will become once the promotional rate expires because it will apply to any new or existing revolving balances.

In this commonly used method for calculating finance charges, your issuer may track your balance each 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.

To figure out the adjusted balance, your issuer may 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.

You’ll probably have some fees associated with your credit card. The most common credit card fees include the following:

You can think of annual fees like membership dues. If your card has an annual fee, your issuer may bill your account. Not all cards have an annual fee. If you have a card that does, taking full advantage of perks and rewards could offset the cost.

A balance transfer is when you move credit card debt from one card to another. If a balance transfer credit card offers a temporary promotional interest rate, it may help you save money on interest charges. But there might be a balance transfer fee, and opening a new credit card account can temporarily affect your credit scores. It’s also worth noting that you can’t typically transfer balances between two cards from the same issuer.

Cash advances allow you to borrow money against your existing credit lines. But cash advances can incur other fees and have higher interest rates than standard credit card purchases. If you need a cash advance, you may be able to use special checks or an ATM to withdraw cash.

Traveling abroad? Check whether any purchases you make outside the U.S. include this fee, also known as a foreign transaction fee. Capital One doesn’t charge this fee. View important rates and disclosures.

Missing a payment due date may result in a late fee.

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 use the Confirm Purchasing Power tool to check if an over-limit purchase may be approved. You can also disable the ability to spend over your credit limit in your over-limit preferences.

If you pay your bill with a check that bounces, your card issuer may charge you a returned payment fee.

Common credit card rewards include:

• Cash back: Typically, the most straightforward reward structure is cash back. For every eligible purchase, you can earn a percentage back. 

• Miles: Geared toward travelers, miles can be earned on eligible purchases and typically redeemed for flights, hotel stays and other travel-related expenses.

If you’re comparing rewards cards, it can be helpful to look for rewards that are flexible and easily earned and redeemed.

Knowing some common credit card terms can help you better understand your credit card. And when it comes to comparing cards, learning key credit card terms can help you decide what best fits your needs and budget.

If you’re in the market for a new card, you can compare credit cards from Capital One and see whether you’re pre-approved without hurting your credit scores.