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Credit Card Basic Terms

In order to be able to make a smart comparison shopping for a credit card you need to be familiar with several terms that you will often encounter in brochures or different conversations about credit cards. They are as follows:

  • Finance Charge

    This term refers to the money you pay in return for the credit use. Finance charges may include such payments for the card use as interest rates and cash advance fees. The latter represents the fees that you are liable to once the lender borrows you their money. You should keep a careful track of the fees you pay on the cash advances and the purchases, because it is usually the case to pay higher interest rate on cash advances. 

  • Annual Fee 

    This fee is collected from the credit card holders on yearly basis. Some like to compare it with a membership fee. However, the trend has been towards the elimination of the annual fees, which has been called for by the high competition in the field.

  • Grace Period

    This period refers to the time during which the credit card issuer has the right to pay a credit card bill without being charged the finance charge explained above. However, you will benefit from the grace period if you have managed to pay all of your credit card balance every month and an exception is made for balance forward carry and cash advances.

  • Annual Percentage Rate (APR)

    The ARP represents the annual percentage rate that is collected on the finance charge. You should have in mind that the credit card plans' interest rates may vary with time. Known as variable-rate plans, these changes may be influenced by movements in other interest rates (e.g. prime rate, Treasury bill rate and etc.). Known as fixed-rate plans, these credit card plans have adjustments that are not pegged to movements in other interest rates.

  • Fixed Rate

    This rate is charged as a percentage of the finance charge. It is a fixed percentage that is charged every year.

  • Variable Rate

    In order to calculate the variable rate of a credit card you should apply the following formula:

    Variable Rate = Prime Rate + Added Percentage

    The prime rate is of a variable value.

  • Introductory Rate

    A type of annual percentage rate, this rate is of temporary character and thus lasts for around six moths. After this it is transferred into a fixed or variable rate.

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