Banking and Finance

Credit Card Terminologies That You Need To Know

This post may contain affiliate links, which means I may receive a small commission, at no cost to you, if you make a purchase through a link.

Credit cards have become part of our financial lives. The amount of financial freedom offered to us by the credit card cannot be matched.

From helping us meet emergency costs to funding working capital needs, we no longer can’t live without them. Despite all these great advantages they offer, credit cards come at a cost.

One that could be very punitive if not well managed.

Understanding the product is key in managing these costs. In my research, I have realized that the majority of card users don’t understand the product they happily consume.

This article will give an in-depth view on the common credit card terminologies. Understanding them helps maximize the benefits and reduce the costs ensuring the cards work to your advantage.

credit cards

Card tenor

In finance, tenor is the period through which a financial contract has been extended to you. A case example is the loan tenor. This is the period through which you should have paid your loan principal and interest.

This applies to credit cards as well. Credit card tenor is used to describe the timeline through which you are supposed to clear your utilized card limit and the interest accrued.

Mostly, a credit card tenor usually runs for one year. Understanding the tenor helps in planning the utilization amount and repayment limit. In most cases, once the tenor expires, the card is renewed.

Read more related articles here

Interest rate

Credit cards come at a cost to the holder. This is because you have access to debt money. Interest rates are usually calculated annually. Through the annual rate, then it is possible to get monthly and daily rates. Interest rates are usually divided into two,

  • Fixed rates
  • Variable rates

Fixed rates remain constant thought the card tenor while variables rates may change from time to time due to issues like default, government rate change, and promotions.

As a cardholder, your task is to ensure you keep the interest rates as low as possible or even eliminate them. Cost reduction ensures you have more benefits from the card.

Billing cycle

A credit card billing cycle is the time interval between the last billing and the next one. Depending on the issuer, it ranges from 28-31 days.

A billing cycle is a consistent process that happens the same month after month. Most issuers maintain consistency to make it predictable for the customers.

Mostly, the last day of a billing cycle marks the closure of your credit card statement. The billing cycle helps establish the payment due date.

Thus, it is necessary to understand your billing cycle as it helps with the payment schedule planning.

Payment due date

This is the period that you are supposed to pay the amount utilized or at least the minimum required. The minimum amount may be calculated in form of a percentage. E.g. 20%.

Mostly, the payment due date is 25-31 days from when the billing cycle happens. Any payment after the payment due date usually attracts penalties.

Penalties increase the cost of having the card and may also affect your credit score and the interest rate charged.

Understanding the payment due date ensures you can make payments on time and avoid the cost of penalties in case of failure.

Over Limit fees

Over-limit fees are charges incurred by the cardholders when they exceed the allowed limit. Every credit card usually has a maximum credit limit allowed.

As a cardholder, you should keep a tab of your remaining balance to avoid going beyond the limit. These fees are punitive to discourage overspending.

In some instances, card issuers usually decline transactions once the limit is hit. However, some complete the transactions. Over limit spending is an indication of poor financial discipline and lack of product understanding by the cardholder.

Cash Advance

As a credit cardholder, you have the capability of cashing out from the bank or the ATM. Cash accessed from a credit card is a called cash advance.

This option should only be utilized when there is an utmost necessity because it comes with a huge cost to the user. To discourage advancing cash, Card issuers usually tend to

  • Limit the amount of money you can withdraw.
  • Charge cash advance fees.
  • Charge interest on cash advance.

It is also key to note that interest charges on a cash advance start accruing immediately you make a withdrawal without any grace period. Next time you think about taking a cash advance, please factor in the associated costs too.

Grace period

This is the period between the billing cycle and the payment due date. During this period, you are not charged any interest if you pay your balance in full.

Usually, it is around 3 weeks and does not apply if there was a balance from the previous period. Understanding the grace period helps reduce the card costs by avoiding the interest charges.

Interest is one of the biggest costs of having a credit card and hence any avenue to reduce it should be fully utilized.

Annual fees

Annual fees are charges incurred by credit card holders annually. They are usually loaded into the statements yearly. However, not all card issuers charge them due to various conditions including the creditworthiness of the cardholder.

The annual renewal fee is usually charged as a one-off fee or broken down into monthly charges

Processing fees

These are fees/costs incurred for every transaction done through a credit card. They range between 2 5%. Majorly, processing fees are usually incurred by the merchants.

The processing fee is a general term that includes costs. Examples are interchange fees and discount rates. Hence, as a merchant, it is key to shop for a service provider offering lower processing fees as they have a direct impact on profitability.

Conclusion

Credit cards remain a key component of our lives as they help us meet our emergency needs. They are also cheaper compared with other credit options if utilized well.

To benefit fully from them, you need to take advantage of the grace period, avoid going over the limit, and minimize the frequency of cash advancing.

They also assist minimize the challenge and costs associated with the handling of cash. They assist with spending tracking and record keeping.

Before settling on a card issuer, kindly ensure you are familiar with their terms and conditions. Always settle for the one offering you the best terms as per your needs.

15 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Share
Tweet
Share
Pin