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So, think you know everything there is to know about credit cards? Maybe you do, maybe you don’t. In this post, we cover some of the basic definitions pertaining to credit cards that if you don’t already know, you should.
So what are the different types of credit cards?
Yes, there are different types. It isn’t as cut and dry as you think. There isn’t just one all encompassing credit card that covers everyone.
1. Standard credit card
2. Premium credit card
3. Store credit card
4. Secured credit card – a ‘secured credit card’ is a credit card used to build a good credit record for people with a damaged or poor credit score or for people with little or no credit history
Credit Limit
The credit card limit is the maximum allowable amount you can charge on your credit card. This covers purchases, balance transfers, cash advances, finance charges and fees. A fee may charged by the lender if you go over your limit.
Balance
The balance on your credit card at any given time is the total of your purchases, finance charges, and credit card fees. The higher your credit card balance, the lower the available credit you have to make additional purchases, unless you have a charge card or no-limit credit card. The higher your balance, the higher your credit utilization which will have a negative impact on your credit score.
Credit Utilization
Credit Utilization is the amount of purchasing power you have, calculated as the total credit available divided by the total debt. Credit utilization is 30% of your credit score and is expressed as a percentage. Higher credit utilizations result in lower credit scores. Credit utilization is also known as debt to credit ratio.
Example: credit available = $1000, total debt = $500, credit utilization = 50%
Annual Percentage Rate (APR)
The APR is the interest rate applied to a balance carried beyond the grace period. Credit cards can have different APRs for different types of balances, e.g. balance transfers or purchases. Balance transfers and cash advances usually have higher APRs than for purchases.
Your APR may increase when you’re late on your payment to a particular creditor, and other creditors if your card agreement includes a universal default clause.
APRs can be fixed or variable. A fixed APR can change, but the creditor must inform you in writing before changing the rate. A variable APR will change from time to time.
Universal Default Clause
Universal default happens when a lender enforces default terms (usually imposed on borrowers who have missed payments or exceed balances) on a borrower that has defaulted with another lender. For example, your American Express interest rate increases because you were late on a payment on your Citibank VISA. Universal default allowed credit card issuers to increase interest rates ‘at anytime, for any reason.’
Grace Period
The grace period is the amount of time you have to pay your balance in full before a finance charge is applied to your purchase. If you carried a balance from the previous month, you may not have a grace period for your new purchases. In addition, balance transfers and cash advances typically do not have a grace period.
When balances don’t have an applicable grace period, interest is applied right away.
To find out the length of the grace period refer to the credit card application or your credit card agreement. Your monthly statements should also include the number of days in the grace period.Finance Charge
Finance charges are the cost of carrying a balance. Finance charges are computed using your balance and APR. Creditors use different methods for calculating your finance charge. They may consider one or two billing cycles, use an adjusted, average, or previous month’s balance, and may include new purchases.
In cases where you must pay a finance charge (no grace period applies), your creditor may assess a minimum finance charge. If your calculated finance charge is less than the minimum, you must pay the minimum.
Incentives and Rewards
Some credit cards offer rewards and incentives for using their credit card. Rewards come in several different forms: cash back, points to redeem, and discounts.
Types of Rewards
Cash back rewards are perhaps the best kind of reward you can receive. A credit card that offers cash back usually rewards cash as a percentage of purchases made using the credit card. For example, you might receive 1% cash reward for each $1 you charge. Cash can also be rewarded in specific increments once you charge a certain amount of money, like a $25 reward when you charge $2,500.
The points reward system offers a certain number of points per $1 of purchases. These points can be redeemed for travel, merchandise, gift certificates, and sometimes cash. The credit card may place limits on the vendors with which rewards can be redeemed.
Some credit cards reward you with airline miles that can be redeemed for airline tickets. The amount of miles rewarded varies by credit card. Similarly, the number of miles needed to purchase a flight varies by airline.
Rewards in the form of discounts on good and services are also available.
Credit Card Fees
There are different situations that you might incur credit card fees. Annual fee, finance charge, late fee, and over-the-limit fee are some of the most common fees.
Yes it’s true. Credit cards are not free. Not by a long shot. Since different type of credit cards charge different types of fees, it is a good idea to know what charges might be applicable to you.
Annual Fees
A credit card annual fee is a yearly fee, usually ranging from $15 to $300, that’s charged by the credit card company for the convenience of the credit card.
Which cards have it: mostly secured cards, charge cards, and subprime credit cards
How much is it: varies, usually from $25 to $300/year
How often is it charged: once a year
How to avoid it: ask your creditor to waive the fee. Some credit cards automatically waive the fee if you make a certain amount of purchases in a year.
Application Fees
A credit card application fee is the fee charged by a credit card company or bank for processing your application for credit.
Which cards have it: All credit cards can have it, mostly secured credit cards
How much: varies by credit card, $10 – $50 per application
How often is it charged: once each time you make a credit card application
How to avoid it: ask to have it waived or apply for a card without an application fee
Cash Advance Fees
A cash advance is an amount of cash borrowed against your credit limit.
Which cards have it: cards that allow you to withdraw a cash advance
How much: usually 1-3% of the advance per cash advance transaction
How often is it charged: once each time you make a cash advance
How to avoid it: use a card that doesn’t charge fees for cash advances
Balance Transfer Fees
A balance transfer fee is charged when you make a balance transfer.
Which cards have it: cards that allow balance transfers
How much: usually 1-3% of the amount transferred per transfer
How often is it charged: once per balance transfer
How to avoid it: use a card that doesn’t charge balance transfer fees
Finance Charges
The finance charge is an interest fee charged on revolving credit accounts.
Which cards have it: all cards except those with zero percent interest rates
How much: depends on your card’s APR, balance, and method of calculating finance charge How often is it charged: once per billing cycle
How to avoid it: pay your balance in full before the grace period expires
Late Fees
A late fee is a fee imposed when your payment is received after the due date or grace period.
Which cards have it: all cards
How much: $15 – $39 each billing cycle you miss a payment or pay less than the minimum
How often is it charged: once each billing cycle you are late
How to avoid it: pay your bills on time or call your creditor ahead of time to make payment arrangements
Over-the-Limit Fees
An over-the-limit fee is charged when you exceed your credit limit through purchases, fees, or finance charges.
Which cards have it: all cards with a credit limit
How much: $15 – $39 each billing cycle you are over the limit
How often is it charged: once each billing cycle you are over your credit limit
How to avoid it: Keep your credit card balance below the credit limit
Return Check Fees
A return check fee is charged by a creditor or lender when your payment check is returned by your bank.
Which cards have it: all cards
How much: varies, ~$38
How often is it charged: once each time your check is returned by the bank
How to avoid it: make sure you have funds available in your account when you write a check for payment.
Have something to add? We would love your comments at www.aboutcredit.ca/blog
What credit cards are out there that don’t charge fees for using them in foreign countries?
I am going out of the United States this upcoming summer for 3 months and would like to have a credit card on me that I will be able to use in Europe without being hit with transaction fees. Does anyone know of a credit card company that issues cards without charging an exponential amount of interest or transaction fees?
Answer
Capital One issues some cards that do not charge additional fees for international transactions. Credit Unions often issue cards that do not charge international fees either.
Whatever card you travel with remember to contact the credit card issuer before you leave the USA to tell them when you are traveling and to what countries. Many issuers freeze your credit card once they start noticing foreign transactions, especially in some countries, to prevent fraud.