Credit Card Terminology Explained

By Sandy Naidu | November 29, 2007

These days Credit Cards have become a common accessory in many wallets. We can’t imagine our lives without a credit card. However most of us don’t really understand the various terms used in the credit card brochures. In this post I am going to attempt to explain what these various terms mean.

A Credit Card issuer lends the consumer money to purchase an item from a merchant.

The money is not physically exchanged but will be credited directly to the merchant’s account. The consumer has to repay the money to the issuer within a certain period of time or else risk having to pay huge amounts of interest and fees.

Credit Cards offer you the convenience of ‘buy now and pay later’. You don’t have to carry huge amounts of cash in your wallets anymore. These days you can use your credit cards to purchase almost anything. If used properly credit cards can do wonders for your finances and on the same token if not used properly it can wreck your finances.

There are five main types of Credit Cards:

    Best Credit Cards

  • Bank Card (accepted only in Australia)
  • Master Card (accepted Internationally)
  • Visa (accepted Internationally)
  • American Express (accepted Internationally)
  • Diners Club (accepted Internationally)

Financial Institutions (issuers) offer one or more of the above types of credit cards. The terms and conditions of a credit card are set by the financial institution that is offering the credit card. For example the terms of the Master Card offered by ANZ can be different to the Master Card offered by Commonwealth Bank.
 

The Fees:
The following are the main fees charged by most issuers of credit cards:

  • An annual fee
  • Fees for transactions made in foreign currency
  • If an additional member is also signed on to your card (that is two people share the same card) then additional card holder fee
  • If you exceed your credit card limit you will be charged a fee
  • If you don’t pay the minimum amount a fee will be charged

If you have all your accounts and credit cards with the same financial institution then the financial institution will waive off some the above fees. You have to check with your financial institution and see if you qualify for any fee exemptions.

Credit Limit:
Every card comes with a credit limit attached to it. If you exceed the credit limit the issuer of your card will charge a huge fee. The credit limit is determined based on your income and expenses. If you are not sure what your credit limit is look at your account statement - its usually shown on the top of the statement. One of the worst things you can do with a credit card is to exceed your credit limit. Don’t ever exceed the credit limit. You are only digging a big hole for yourself if you exceed the limit.

Minimum Payment:
This is the minimum amount you have to pay in a given statement period. The minimum amount is usually between 1 and 3 percent of your closing balance. If you however exceed the credit limit in a given period then most financial institutions will add the amount you exceed the credit limit by to the minimum payment. If you don’t pay the minimum payment then the financial institution will charge a fee. One of the common misconception is that if you pay the minimum payment amount then you don’t have to pay any interest. This is incorrect. If you pay only the minimum payment you can still get charged interest. Minimum Payment does not relieve you from any interest - its the minimum amount you need to pay to relieve yourself from the minimum payment fee.

Interest Free Period:
This is the number of days no interest will be charged for the purchase you made using your credit card. However if the interest free period for a credit card is 55 days then it does not necessarily mean that all your purchases get 55 days free interest period. The actual interest free period is dependent on the statement start and end dates.

Lets say your statement period is 30 days (i.e. a new statement is issued every 30 days) and you get around 25 days to pay the outstanding amount (25 days from the end of the statement date) . So your interest free period in this case is 55 days.

If you make a purchase one day before the statement is issued then you get an interest fee period of only 26 days (1 day to the statement issue date plus the 25 days to pay the outstanding amount for that statement). If you however make your purchase on the date the statement ends then you get the full 55 days interest free period (30 days of the next statement period plus 25 days to outstanding amount due date).

So you really have to be careful with the interest free period…Its not as simple as it sounds. Remember that its not uniformly applied across all purchases.

Cash Advances:
As many of you know you can take a cash advance using your credit card. There is no interest free period for cash advances. You get charged interest from the day you take cash out.

Interest Charges:
The best way to avoid interest charges is to pay the entire outstanding amount on your statement by the due date not just the minimum payment. If you don’t pay the outstanding amount you will be charged interest from the date of purchase for each item – in the process you forfeit the interest-free period on all those past purchases. And here comes an even bigger loophole - until you pay the balance off in full you will not get any interest-free period on current and future purchases. So basically you lose interest free advantage.
All this can be quite confusing…
So let me write in simple terms how to make the best use of credit cards:

  • No cash advances
  • Always pay the entire outstanding amount by the due date - not just the minimum payment due.
  • If you are good at managing your finances then go ahead and use your credit card for all your purchases but always remember to pay the outstanding amount by the due date.
  • Never exceed credit limit.
  • And if you are struggling to pay off the credit card debt then make good use of the rewards program - most of the financial institutions allow you to redeem your points for’ cash back into credit cards’…opt for that and don’t get tempted by the rewards.

And here come the most important part - Don’t ever make any purchases just because you have the luxury of paying back later.

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