Acquiring
Financial Institution
Merchants must maintain an account
with an acquiring financial institution to receive credit for credit card
transactions. Daily credit card totals are deposited into the merchant's
account minus any fees.
Adjusted Balance
A method used by some card issuers
in which they subtract all payments made during the month, then add the
finance charges.
Affinity Card
A card offered by two organizations,
one a lending institution, the other a non-financial group. Schools, non-profit
groups, pro wrestlers, popular singers and airlines are among those featured
on affinity cards. Usually, use of the card entitles holders to special
discounts or deals from the non-financial group. See also co-branded
cards.
Air
Miles
One of the most popular rewards issued by airline-affiliated
co-branded cards. Air
miles are earned with every use of the card, and then transferred monthly
to the card holder's account with that airline.
Annual
Fee
A bank charge for use of a credit card levied
each year, which can range from $15 to $300, billed directly to the customer's
monthly statement. Many credit cards come without an annual fee.
Annual
Percentage Rate (APR)
The
interest rate reflecting the total yearly cost of the interest on
a loan, expressed as a percentage rate. Under the federal Truth
in Lending Act, it must be calculated in a standard way to allow consumers
to make 'apples to apples' comparisons of lending terms.
Authorized User
Any person to whom you give
permission to use a credit card account.
Average
Daily Balance
This is the method by which most credit cards calculate your payment due.
An average daily balance is determined by adding each day's balance and
then dividing that total by the number of days in a billing
cycle. The average daily balance is then multiplied by a card's monthly
periodic rate, which is
calculated by dividing the annual percentage rate by 12. A card with an
annual rate of 18 percent would have a monthly periodic rate of 1.5 percent.
If that card had a $500 average daily balance it would yield a monthly
finance charge of $7.50.
See two-cycle billing.
Balance
Transfer
The process of moving an unpaid credit card debt from one issuer to another.
Card issuers sometimes offer teaser
rates to encourage balance transfers coming in and balance
transfer fees to discourage them from going out.
Balance
Transfer Fee
Fee charged customers for transferring an outstanding balance from one
card to another.
Bankruptcy
The last resort for a borrower. If the borrower has difficulty
meeting rent or mortgage payments and is completely extended beyond the
credit limit, and the collection agencies are uncooperative, the borrower
may need to file for protection. There are two basic ways of filing for
personal bankruptcy. A Chapter 7 bankruptcy declaration gets rid of all
debts (except some taxes and maybe alimony payments); Chapter 13 allows
a borrower with a steady income to pay off bills over a 36- to 60-month
period. It's a serious step for a borrower because it severely limits
access to credit for years to come.
Billing
Cycle
The number of days between the last statement date and the current statement
date. Also see average
daily balance and two-cycle
billing.
Billing
Statement
The monthly bill sent by a credit card issuer to the customer. It gives
a summary of activity on an account, including balance, purchases, payments,
credits and finance charges.
Important changes to a credit card account are often included in small-print
fliers that are sent with the statement.
Card
Holder Agreement
The written statement that gives the terms and conditions of a credit
card account. The card holder agreement is required by Federal Reserve
regulations. It must include the Annual
Percentage Rate, the monthly minimum
payment formula, annual fee,
if applicable, and the card holder's rights in billing disputes. Changes
in the card holder agreement may be made, with written advance notice,
at any time by the issuer. Rules for imposing changes vary from state
to state, but the rules that apply are those of the home state of the
issuing bank, not the home state of the card holder. See national
issuers.
Cash
Advance Fee
A charge by the bank for using credit cards to obtain cash. This fee can
be stated in terms of a flat per-transaction fee or a percentage of the
amount of the cash advance. For example, the fee may be expressed as follows:
"2%/$10". This means that the cash advance fee will be the greater
of 2% of the cash advance amount or $10. The banks may limit the amount
that can be charged to a specific dollar amount. Depending on the bank
issuing the card, the cash advance fee may be deducted directly from the
cash advance at the time the money is received or it may be posted to
your bill as of the day you received the advance. The cost of a cash advance
is also higher because there generally is no grace
period -- interest accrues from the moment the money is withdrawn.
Cash Cards
Cash cards, similar to pre-paid phone cards, contain a set amount
of value, which can be read by a special cash card reader. Participating
retailers will use the reader to debit the card in increments until the
value is gone. The cards are like cash -- they have no built-in security,
so if lost or stolen, they can be used by anyone.
Charge Card
A card that requires a full payment of the charge by the due
date. Unlike credit cards, which give borrowers a revolving
line of credit and lets them borrow against it, carrying a balance
with an agreed-to interest
rate, charge cards do not allow carrying a balance and no interest
is charged. American Express and Diner's Club are examples of charge cards.
Classic Card
Brand name for the standard
card issued by VISA.
Closed-account Fee
A fee charged for shutting down an account. Sometimes charged
if the account is closed before a certain time period has passed.
Co-branded
Cards
A type of affinity card issued through a partnership between a bank and
another retail company. For instance, a large department store may co-brand
a card with a bank. The card would have two brand names on it -- the bank's
name and the store's name. Usualy, the attraction of the card is special
deals with the retail partner. Many -- particularly the ones affilliated
with airlines that offer air miles
-- are popular enough to command a hefty annual
fee.
Co-signer
A person who co-signs a credit card application with the primary applicant.
The co-signer agrees to be liable for any balance that the primary applicant
allows to go into default.
Credit Card
A plastic card that with a coded magnetic stripe that, when signed,
entitles its bearer to a revolving
line of credit, whose size and
interest rate are determined by the borrower's income and credit
report. Credit cards began in the late '40s when banks began giving
out paper certificates that could be used like cash in local stores. The
first real credit card was issued in 1951 by Franklin National Bank in
New York.
Credit
Insurance
A policy that pays off the card debt should the borrower lose his job,
die or become disabled. The structure of protection for a revolving credit
card debt is calculated each month to cover only the debt that existed
at the last billing cycle.
Credit
Limit
The maximum amount of charges a card holder may apply to the account.
The Consumer Federation of America suggests people carry credit lines
no greater than 20 percent of their gross household
income. For example, people with a gross income of $50,000 would cap
credit lines at $10,000.
Credit
Report
The credit report often is a critical factor in credit scoring systems
that lenders use to issue credit cards, mortgages or other loans. It is
a good idea to check your credit report to know where you stand and correct
any errors. If you've made mistakes in paying previous loans, bounced
checks, made late payments or had other problems, you may be able to correct
them -- or at least reduce the amount of damage they will do to your credit.
If someone else has made a mistake that ended up on your credit, you want
to get it removed. To make certain your credit reports are accurate, it
is a good idea to check with the three major national credit bureaus:
Equifax,
Experian
(formerly TRW) and Trans
Union.
Debit
Card
A bank card with direct access to a card holder's account, usually a checking
or savings account. The card acts like a check with the money withdrawn
from the existing account balance. The withdrawal of funds is immediate
with online debit cards,
delayed a day or two with
offline debit cards. Debit cards that carry the logo of either MasterCard
or VISA can be used at any location
that displays that network's logo.
Default
An account on which the payments have not been made according to the terms
of the card holder
agreement is in default. Some card issuers now declare you in default
-- enabling them to penalize you via a higher
interest rate -- if you miss a payment with any creditor.
F
(Fixed)
If the letter "F" appears after the annual
percentage rate (APR) the interest
rate is fixed and not subject to adjustment.
Fair Credit Billing Act
Passed by Congress in 1975 to help customers resolve billing disputes
with card issuers. Disputes include everything from computational errors
and incorrect charges to the crediting of payments. The act requires issuers
to credit payments to a customer's account the day they are received.
To be protected under the law, the consumer must write to the issuer within
60 days of the mailing date on the bill with the error. The issuer is
then required to investigate and either correct the mistake or explain
why the bill is correct within two billing
cycles. The issuer also must acknowledge a customer's complaint in
writing within 30 days. Each issuer is allowed to set specific payment
guidelines. If any of the guidelines are not met, the issuer can take
as many as five days to credit the payment.
Finance
Charge
The charge for using a credit card, comprised of interest costs and other
fees.
Foreign Currency Surcharge
A new charge imposed by some credit card issuers that imposes a fee
on purchases made in a foreign currency.
Gold
Card
A credit card that offers a bigger line of credit, generally $5,000 and
up, than a standard
card. Income requirements are
higher, generally $35,000 at minimum. In addition, issuers provide extra
perks or incentives to card holders.
Grace
Period
If the credit card user does not carry a balance, the grace period is
the interest-free period of time a lender allows between the transaction
date and the billing date.The standard grace period is usually between
20-30 days. If there is no grace period, finance
charges will accrue the moment a purchase is made with the credit
card. People who carry a balance on their credit cards have no grace period.
Household
Income
The total income of all members of a household. An important yardstick
used by credit card issuers evaluating applications for joint
credit.
Index
A published market-based figure used by lenders to establish a lending
rate. The most common indices are: the one-year Treasury Constant Maturity
Yield; the Federal Home Loan Bank (FHLB) 11th District Cost of Funds;
prime rate as listed in the
Wall Street Journal.
Indexed
Rate
The sum of the published index
plus the margin. For example, if the index is 9% and the margin 2.75%,
the indexed rate is 11.75%.
Interest
Rate
The fee charged form money lent. Under the Truth
in Lending Act, it must be disclosed as an APR
to credit card users on the card application form.
Introductory
(or intro) Rate
The low rate charged by a lender for an initial period to entice borrowers
to accept the credit terms. After the introductory period is over, the
rate charged increases to the indexed
rate or the stated interest
rate. Often called a teaser
rate.
Issuing
Financial Institution
The financial institution that issues a credit card and bills the customer
for purchases made against the card account. Also see national
issuers.
Joint
Credit
Issued to a couple based on both of their assets, incomes and credit
reports. It generally results in a higher credit
limit, but makes both parties responsible for repaying the debt.
Late
Payment Fee
Charge to customer whose monthly payment has not been received as of the
due date or stated deadline for payment as shown on the billing
statement. This fee can be stated in terms of a flat per-transaction
fee or a percentage of the amount of the cash advance.
MasterCard
MasterCard, a product of MasterCard International, is distributed by issuing
financial institutions around the world. Card holders borrow money
against a credit line and pay it back with interest if the balance is
carried over from month to month. Its products are issued by 23,000 financial
institutions in 220 countries and territories. In 1998, it had almost
700 million cards in circulation, whose users spent $650 billion in more
than 16.2 million locations.
Minimum
Payment
The minimum amount a card holder can pay to keep the account from going
into default. Some card issuers
will set a high minimum if they are uncertain of the card holder's ability
to pay. Most card issuers require a minimum payment of 2 percent of the
outstanding balance.
Monthly Periodic Rate
The interest rate
factor used to calculate the interest charges on a monthly basis. The
factor equals the yearly rate divided by 12. See periodic
rate.
National
Issuers
The overwhelming majority of credit cards in the U.S. come from a handful
of national issuers, such as First USA, MBNA America and Bank of America.
They often originate from lender-friendly states such as Delaware and
South Dakota that impose no limits on what card holders can be charged.
Offline
Debit Card
A new development in cards that share traits of both ATM and credit cards.
Offline debit cards have
the VISA or MasterCard
logo on them and can be issued by a bank, either instead of or in addition
to an ATM card. These cards can be used at any establishment which displays
the VISA or MasterCard logo, but using them doesn't access a line of credit
-- it debits a customer's checking account. It is "offline"
because the account isn't directly accessed -- there's a delay of 24 to
72 hours before the debit is made in the account. If you sign a slip of
paper to conclude the transaction, it was offline. In the U.S., no Personal
Identification Number (PIN) is required to use an offline debit card.
Online
Debit Card
An online debit card deducts funds from the bank account immediately,
as soon as the card is used. It may have the VISA
or MasterCard logo, or only
the issuing bank's logo, like an ATM card. There is no delay for processing
the transaction -- the money is immediately deducted from your account.
In the U.S., if you entered a Personal
Identification Number (PIN) during the transaction, it was online.
Over-the-limit
Fee
A fee charged for exceeding the credit
limit on the card.
Pay-down
Program
Steps for paying down a credit card balance. First, stop charging on the
card and make the normal monthly minimum payment by the due date. Then,
two weeks later, send half the amount again, and two weeks later, half
again. Repeat the half payments on the two-week schedule until the balance
is paid.
Penalty Rate
Several percentage points higher than a card's current annual
percentage rate, which goes into effect after two late payments. On
some cards, a single late payment triggers a penalty rate.
Periodic
Rate
The interest rate described
in relation to a specific amount of time. The monthly periodic rate, for
example, is the cost of credit per month; the daily periodic rate is the
cost of credit per day.
Personal
Identification Number (PIN)
As a security measure, some cards require a number to be punched into
a keypad before a transaction can be completed. The number can usually
be changed by the card holder.
Platinum
Card
A credit card with a higher limit and additional perks than a gold
card.
Point of Sale (POS)
An increasingly popular way for consumers to avoid ATM surcharges is to
get cash returned from their online
debit card via a cash return at the point of sale -- such as a grocery
store.
Pre-approved
A credit card offer with "pre-approved" only means that
a potential customer has passed a preliminary credit-information screening.
A credit card company can spurn the customers it invited with "pre-approved"
junk mail if it doesn't like the applicant's credit
rating.
Previous Balance
A method used by some card issuers where they base their
finance charges on the amount owed at the end of the previous billing
cycle.
Prime
Rate
The interest rate a bank
charges to its best or "prime" customers. Each bank will quote
a prime lending rate. Many institutions quote prime rates established
by large money center commercial banks such as Citibank or Chase Manhattan.
There is also a prime rate average listed in the Wall Street Journal that
is an average of the largest commercial banks. The rate given to consumers
on their credit cards is often based as the prime rate plus a certain
percentage, which represents the lender's assessment of the risk in lending,
plus its profit margin.
Private Label Cards
A private label card is issued by a retail outlet, such as a department
store or gasoline company, and contains the logo of the retailer It is
accepted only by the retailer who issued it. Retailers partner with a
bank or a card-issuing management company to back the cards.
Rebate
Card
This is a card that allows the customer to accumulate cash, merchandise
or services based on card usage.
Revolver
A term credit card issuers use for card holders who roll over part
of the bill to the next month, instead of paying off the balance in full
each month. About seven out of 10 card holders revolve the debt.
Revolving
Line of Credit
An agreement to lend a specific amount to a borrower, and to allow that
amount to be borrowed again once it has been repaid. Most credit cards
offer revolving credit.
Secured
Card
A credit card that a card holder secures with a savings deposit to ensure
payment of the outstanding balance if the card holder defaults on payments.
It is used by people new to credit, or people trying to rebuild their
poor credit ratings.
Smart Card
Smart cards, sometimes called chip cards, contain a computer
chip embedded in the plastic. Where a typical credit card's magnetic stripe
can hold only a few dozen characters, smart cards are now available with
16K of memory. When read by a special terminals, the cards can perform
a number of functions or access data stored in the chip. These cards can
be used as cash cards or as credit cards with a preset credit limit, or
used as ID cards with stored-in passwords. While fairly common in Europe,
the United States has been slower to embrace them -- Americans are happy
with their ATMs and POS
terminals, so merchants haven't seen the need to make the expensive switch
to smart card terminals.
Standard
Card
The basic card offered by issuers. Customers with higher incomes and good
credit reports can qualify
for the higher-limit gold and
platinum cards.
T (tiered)
If the letter T appears after the annual
percentage rate (APR), the interest
rate is based on tiered pricing, with different
periodic rates applied to different levels of the outstanding balance.
The rate shown applies to the lowest of the balance tiers.
Teaser
Rate
Often called the introductory
rate, it is the below-market interest
rate offered to entice customers to switch credit cards.
Titanium Card
A card with an even higher limit than a platinum
card.
Transaction Date
The date that goods or services were purchased or the date the cash
advance was made.
Truth
in Lending Act
A federal law that requires lenders to provide certain information so
borrowers can compare one loan to another. The most important facts lenders
must provide are: finance
charges in dollars and as an annual
percentage rate (APR); the credit issuer or company providing the
credit line and the size of the credit line; length of grace
period, if any, before payment must be made; minimum
payment required; any annual
fees; and fees for credit
insurance, if any.
Two-cycle
Billing
With the two-cycle method, the average
daily balance is calculated from two billing cycles rather than one
and finance charges are
typically higher This method, in effect, wipes out the grace
period for customers who carry a balance. If the bill is not paid
in full at the first billing, interest becomes retroactive back to the
purchase date. Most credit card issuers use the single-cycle average daily
balance method to calculate finance charges.
Unsecured
Debt
Debt that is not guaranteed by the pledge of any collateral. Most credit
cards are unsecured debt, which is a main reason why their interest
rate his higher than other forms of lending, such as mortgages, which
employ property as collateral.
V
(variable)
If the letter V appears after the annual
percentage rate (APR) the interest
rate is variable and subject to change.
VISA
VISA cards, a product of VISA USA, are distributed by financial institutions
around the world. A VISA card holder borrows money against a credit line
and repays those funds with interest if the balance is carried over from
month to month in a revolving line of credit. Nearly 600 million cards
carry one of the Visa brands, and more than 14 million locations accept
Visa cards.
Warning
Signs
These are the signals that credit
bureaus look for in credit card customers' credit
reports. They include frequent late
payments, over-the-limit
fees, and frequent balance
transfers.
Zero
Balance
What shows on a credit card customer's bill when the outstanding balance
has been paid and no new charges have been incurred during the billing
cycle.