1. Annual Fee
An annual fee is a yearly charge by a credit card company or financial institution for using their credit card. If you find a card with useful benefits, paying the annual fee may be a good investment. If you're looking for a starter credit card, finding one with no or low annual fees can be helpful when building credit.
2. APR or Annual Percentage Rate
The annual percentage rate is the percentage a credit card company will charge you on any remaining balance at the end of your statement cycle, otherwise known as the rate used to calculate interest. It's a key concept when learning how credit cards work, especially for beginners looking for their first card. For example, some of the best credit cards for beginners offer introductory APRs, helping you get started on the right foot while building credit.
For example, if you have a credit card with an APR of 10%, and a balance of $500 on your credit card. At the end of your statement cycle, or when it's time to pay the bill, you only pay $300. The credit card company will charge you interest for the remaining $200. $200 x 10% = $20
Other factors, including types of transactions, may apply too. For example, cash advances accumulate interest immediately after the transaction date is posted.
3. Available Credit
Available credit is the amount of credit remaining on your card before reaching the credit limit. Your available credit may have different amounts available for purchases versus cash advances. You can figure out your available credit by subtracting any purchases and interest, from the total credit limit on the card.
For example, if your credit limit is $1,000 and you spend $300, you'll have $700 of available credit left.
4. Balance
Your balance is the amount you owe the credit card company. Your balance can change depending on when and how you use your card – anytime you make a purchase, or complete a payment, your balance changes.
5. Balance Transfer
A balance transfer is typically when you move a remaining credit card balance to a new card. This can help someone who has a higher credit card balance, move to a credit card with a lower APR, in order to pay less interest on their balance. Eventually, the goal is to pay off the balance completely.
6. Cardholder Agreement
A cardholder agreement outlines the rules of your credit card like fees, interest rates, and payment terms. It's important to review it so you know how your credit card works and what fees you might face. For those learning how to build credit this agreement helps you understand the responsibilities of credit card ownership.
7. Cash Advance
A cash advance lets you withdraw cash from your credit card. You can typically do this at an ATM, in-person at a branch, or if your card comes with convenience checks. There are often fees associated with a cash advance – cash advance APR, cash advance fee, ATM or bank fee, and interest. It's important to read your Cardholder Agreement to fully understand what type of fees you could face.
8. Credit limit
This is the maximum amount of money you can spend on a credit card, before facing possible fees. If you meet your limit threshold, the credit card company may decline you for making purchases until you reduce your overall card balance. Credit card companies determine your credit limit based on a variety of factors such as your income and information from your credit report.
9. Credit report
A credit report is a statement with information about your credit activity and your current credit situation, such as payments on loans, and the status of your credit accounts. Lenders review your credit report when deciding whether to give you a loan or a credit card.
10. Credit Score
A credit score shows how likely you are to pay back money you borrow, like loans or credit card balances. Lenders use different methods to calculate it, so your score might vary slightly between them.
Here's what affects your credit score:
Payment History – Do you pay bills on time?
Any amounts you owe – How much debt do you have?
Length of credit history – How long have you had credit?
Any new credit – Have you opened new credit accounts recently?
What mix of credit do you have – Do you have different types of credit (like loans and credit cards)?
A higher credit score shows lenders you're more likely to pay back loans, which can help you qualify for better rates and lower APRs.
11. EMV Chip & Tap-to-Pay
Most credit cards come with EMV chips and tap-to-pay technology. The EMV chip creates a unique code for each transaction, adding an extra layer of security. Tap-to-pay (also called contactless payment) uses similar technology, but instead of inserting your card, you simply tap it near the payment terminal. Both methods protect your information and make payments faster, easier, and more secure than traditional magnetic stripes.
12. Fixed APR vs Variable APR
A fixed APR stays the same, while a variable APR is linked to an index, like the Prime Rate, and changes periodically based on the movement of that index.
For example, let's say you have a credit card with an APR of 8% + Prime, and if the Prime Rate is 3%, then your APR for that credit card would be 11%. If the Prime Rate goes up or down, so will your APR for the card. On the flip side, if you have a card with a fixed APR of 8%, it will remain at 8% until the credit card company or financial institution changes the rate.
13. Foreign Transaction Fee
When you use your credit card in another country or make a purchase from an international retailer, you might be charged a foreign transaction fee. This fee helps cover the cost of converting your money into a different currency.
There are two ways this fee might be charged:
Flat fee – A set dollar amount for each transaction (like $2 or $3 per purchase).
Percentage fee – A small percentage of your total purchase (often 1% to 3%).
Look for credit cards with no foreign transaction fees if you travel frequently.
14. Interest
Interest is the cost of borrowing money. If you don't pay your balance in full, interest is charged on what's left. The interest rate is based on the card's APR. Some transactions, like cash advances, may have higher interest rates that kick in right away.
15. Introductory APR
An introductory APR is the special rate applicable for a period after opening a credit card, where the interest rate will be lower than the regular APR of the card. After the intro period, the APR will increase to the standard rate.
For example, if you open a credit card with an intro APR of 6% for 12 months. After the 12 months are finished, the APR will increase to the regular rate with the credit card.
16. Late-Payment Fee
This is a fee credit card companies can charge if you do not meet the minimum payment by your stated due date late, or miss a credit card payment.
17. Minimum Payment
At the end of each statement cycle, there is a minimum payment listed on your bill. This is the smallest payment amount a lender will accept without listing you as delinquent. This amount is calculated based on your total balance; however, some companies may add an additional amount if your account is over-limit.
18. Terms and Conditions
These are rules and guidelines of the agreement between a credit card issuer and the cardholder. This document outlines any fees, the APR, and interest of the credit card.
19. Tokenization
A token is assigned to you when you add your card to a digital wallet. That token is only for that particular device – if you want to add your card to a digital wallet on another device, like a watch, tablet or iPad, you'll receive a new token. It's a safer way to store card information, and provides more security when completing online transactions.
Whether you're working with a starter credit card, exploring credit cards for beginners, or trying to improve bad credit, knowing how credit cards work is essential for your financial future. Ready to learn more? Visit our Learning Center.
NMLS #407985