The lexicon of credit card terms can be confounding. Here’s some help
Do you have trouble speaking credit card? If so, you’ve got plenty of company.
The lexicon of credit card terms is pretty confusing – and issuers don’t bend over backward to make the definitions clear. As a result, “Most people learn by making mistakes,” says Cary Carbonaro, author of “The Money Queen’s Guide: For Women Who Want Build Wealth and Banish Fear.”With that in mind, here’s the lowdown on nine credit card terms that consumers commonly find confusing.
1. Convenience fee. This is a charge for being able to pay for a product or service using a credit card through an alternative payment channel that is not standard for a merchant. Typically, these fees, which are generally a fixed amount, are charged by a third-party providing the payment service, says Linda Sherry, director of national priorities at Consumer Action. For example, when you buy concert tickets through a third-party provider, a convenience fee is often levied. The different card processing networks (Visa, MasterCard, American Express and Discover) have different convenience fee policies. That’s different from a surcharge, however, which is when consumers are charged extra simply for using a card as a payment method.
Your best protection:To avoid paying extra, choose a different payment method when possible, such as debit, cash or check. And when paying for things online, any convenience fee charges should be posted and visible before any sale is complete.
2. Foreign transaction fee. Formerly known as the currency conversion fee, these charges are tacked on as a percentage of purchases made in another country. Credit card holders also can be charged the fee when they buy items that use an overseas bank to process the transaction or for purchases made online from a retailer based outside the U.S. “It just means you bought something in a foreign currency and you have to pay for them to convert to that currency,” says Victoria L. Fillet, financial adviser with Blueprint Financial Planning in Hoboken, New Jersey. Be aware that you may be assessed a dynamic currency conversion fee when making purchases abroad in your country of origin’s currency instead of the local currency.
At about 1 to 3 percent, however, the charges aren’t trivial. “People don’t do the math, but for a $10,000 vacation for a family of four, they can really add up,” says Robert Braglia, a financial adviser with American Financial and Tax Strategies in New York City.
Your best protection: Before you travel or shop abroad, call the number on the back of your credit and debit card and ask if the card charges a foreign transaction fee. If so, you may want to consider applying for a card that doesn’t incur those fees. And to avoid the dynamic currency conversion fee, always choose to process the transaction in local currency with your card.
3. Default rate. Also called the penalty rate, the default rate is a higher interest rate charged by the credit card issuer, usually when cardholders are late making monthly payments. The rate can be returned back to its original APR if the account holder makes six consecutive on-time payments immediately following the rate jump.
Your best protection: Set up automatic payments, so no matter what, you’ll always pay at least the minimum amount due. “It’s a safeguard,” says Sherry.
4. Deferred interest. Deferred interest refers to payment plans that allow you to delay payment of interest during a specified time period. It’s most commonly used by retailers to encourage the purchase of big-ticket items. (Think “no–interest for a year!” or “90-days-same-as-cash!” offers). But beware. Once the deadline arrives, if you haven’t paid off the balance, you will be charged interest on the entire purchase.
Your best protection: Pay off the balance a month early to avoid being levied back interest. For example, if you purchase a $1,000 flat-screen television in a 12-month, interest-free deal, divide the payments by 11 months instead of 12 (about $90.90, not including tax). And don’t wait until the last minute to start repayments or else you risk not being able to afford larger lump sums toward the end of the deferred-interest period.
5. Grace period. This is the time period – at least 21 days – during which you aren’t charged any interest on new purchases. It specifically covers the time between the close of the previous billing period to the payment due date. Pretty much all credit card companies offer cardholders a grace period, unless you got a cash advance from your card, when interest starts accruing immediately. And it sounds great, except if you carry a balance into the next month, no matter how minute. In that case, the credit card company can start charging interest on new purchases as soon as you make them.
Your best protection: You can get back on track, but you may have to pay your balance in full for two months to get your grace period reinstated.
6. Introductory rate or introductory APR. An introductory annual percentage rate (APR), often called a “teaser rate,” is a low rate offered as an incentive by a credit card company to apply for the card. The APR will go up after the introductory period expires. The Credit CARD Act of 2009 requires that introductory periods must last at least six months. Once the introductory period expires, the regular APR kicks in. Teaser rates are often tied to balance transfer card offers. These cards offer a 0 percent interest rate on balances transferred from other, higher-interest, cards for a limited period of time – allowing you to pay off expensive debt interest-free. There’s typically a 3 percent balance transfer fee added to the amount transferred onto the new card. Once the promotional period ends, the APR jumps to a higher rate.
Your best protection: Stay on top of the expiration date. And for balance transfers, figure out if the deal is worth it. “You have to do the math,” Carbonaro says.
7. Minimum finance charge. This kicks in if the finance charge in a billing cycle is less than the minimum charge set by your credit card company. Thus, if your charge is less than $10, you may be charged $1 in interest. It only comes into play if you carry a balance.
Your best protection: The obvious way to avoid this finance charge is to pay your balance in full before the billing cycle ends.
8. Residual interest. Also called trailing interest, if you carry over a balance on a card, the credit card company can charge interest during the period between when your statement is issued and you pay the bill. As a result, on your next bill, you may owe interest even though you may have paid off the balance. Worse, because many consumers aren’t aware this happens, they fail to look at their next statement, assuming they don’t owe anything. “It can harm a lot of people, because they think they paid the bill off, but they didn’t,” says Sherry.
Your best protection: Sherry suggests asking your credit card issuer what you would owe on the day you want to pay off the card – and make sure to deliver the right amount by that date. And always check your next statement to make sure it says zero balance due.
9. Variable rate APR. Most credit cards these days have variable rate APRs, which means the APRs are tied to an index rate, often the U.S. prime rate, so they fluctuate when the prime rate is raised. (Currently 3.5 percent, the prime rate is 3 percentage points higher than the federal funds rate set by the Federal Reserve). In reality, however, “I find people don’t understand that the variable rate changes, why it changes and under what conditions,” says Jim Frazin, founder of Communitas Financial in San Francisco. When the Federal Reserve raises this key lending rate, card APRs pretty much rise in tandem. For example, in December 2015, the Fed raised the key lending rate by .25 percent and most issuers followed suit.
Your best protection: The bigger your card balance, the bigger hit you’ll take if – and when – interest rates rise again. So keep those balances low or, even better, paid off every month so that you don’t have to worry about interest charges or rate hikes.
See related: Demystifying 5 common credit misconceptions, 9 credit lessons for college students