Basic Credit Card Terms - Part I

Have you ever read one of the cardholder agreements for one of your credit cards? If you're like most people the answer is no. And I don't blame you. Those agreements are written in legalese and squeezed together in tiny little print that is barely legible. The truth is that credit card companies don't really want you to read it. They'd rather you remain ignorant. But it is extremely important that you understand the key terms of the agreement that explain how your balance is calculated and what triggers fees or interest rate increases.

Understanding the terms of your credit card agreement will help you to compare cards, to know when you should switch to a new card, and to save money by working the system. To get you started, here is a list of key terms used in credit card agreements and what they mean:

Preapproved - How many times have you received an offer in the mail stating that you have been 'preapproved' for a credit card? This is a somewhat deceptive practice as you have by no means been preapproved for anything. All it means is that you met some initial criteria for creditworthiness. There is no guarantee you will be approved for the card if you choose to apply.

Annual Fee - Many credit cards charge an annual membership fee to their cardholders. Typically, the charge ranges from around $25 to $75, but some premium cards charge as much as several hundred dollars.

Transaction Fee - Credit card issuers usually charge a fee for transactions other than purchases, such as cash advances and balance transfers, though they sometimes waive these fees for new cardholders as part of their introductory offer. The fee amount is usually calculated as a percentage of the transaction, though a minimum fee applies. Some issuers cap the fee at a certain dollar amount, but those are now few and far between.

Grace Period - Taking advantage of a credit card's grace period will let you avoid paying finance charges by paying your balance in full before the due date. If there is no grace period, interest will begin accruing the day you use the card. But if the card has a grace period of say 21 days, interest will not begin accruing for 3 weeks as long as you paid your balance in full the previous month.

Smart consumers use the grace period to avoid paying finance charges on their purchases while still having the convenience of using a credit card instead of cash.

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