What are some common credit card related terms?
APR
APR is a term that you would come across frequently in the context of credit cards. It is short for “Annual Percentage Rate” and is the interest rate that the bank charges on outstanding balances carried on the credit card. It is important to note that although every credit card in the market has an assigned APR, you can use your credit card in a manner such that you do not incur any interest charges at all.
APR, as indicated by the use of the word “Annual” in the name, is an annual percentage rate of interest. However, credit card companies levy this interest rate on a daily basis. To do this, they use the stated APR and divide it by 365 to arrive at the applicable interest rate per day. This is used to calculate interest charges on the outstanding balance on the credit card.
While APR is the most commonly known interest rate with regard to credit cards there are also other rates such as the Cash Advance Rate (applicable to cash withdrawals made using the credit card) and the Balance transfer interest rate (applicable to outstanding balance amount brought forward from another bank’s credit card to this credit card). These charges are different from the APR which is used for all other (retail purchases) charges on the credit card.
Total Credit Limit
Every credit card is assigned a “Credit Limit” by the bank. This is also sometime known as a “Credit Line”. This is the maximum amount up to which the customer can use his or her credit card. Credit limits are assigned based on many factors which include the customer’s income, other liabilities, disposable income, employer, type of credit card applied for and so on. Credit limits are assigned at the time of issuing a new credit card but can also be changed multiple times over the lifetime of the credit cards. These changes can be initiated by either the bank directly or by the bank based on a request the customer. Banks usually initiate an increase in credit limit over a period of time based on a review of the customer’s usage and repayment history on the card. This change could be either an upward revision i.e. an increase in the credit limit based on good usage and repayment history displayed by the customer. Or it could be a downward revision, i.e. a decrease from the previous credit limit assigned based on unsatisfactory performance on the credit card which is most likely due to delayed repayments on the card. Customers can also request for increases or even decreases in their credit limit. Increases in credit limit will of course require the bank’s review and approval as it is effectively an increase in the “line of credit” being offered by the bank. Decreases in credit limit, however, can be done simply based on the customer’s request as there is no additional credit line being granted.
Current Outstanding Balance
This refers to the amount that is outstanding or in other words yet to be repaid to the bank. This could comprise of purchases that the customer has made on the card as well as charges such as interest charges and any other charges that have been levied by the bank. Such charges could include annual fees, late payment charges, over limit charges and so on.
Available Credit Limit
Available credit limit refers to the amount available to the customer to utilize on his or her credit card after taking into consideration previous purchases already made on the card and any other charges such as interest, fees etc. that are yet to be repaid. It is basically calculated as the difference between the Total Credit Limit and the Current Outstanding Balance:
Available Credit Limit = Total Credit Limit – Current Outstanding Balance
Credit Card Billing Statement
A credit card statement is a summary of all transactions that have occurred over the specific billing period. Credit card statements are issued for each “billing period” which is a specific amount of time, usually around 30 days. The credit card statement shows key details of all transactions that had occurred on the card. These include the date of purchase, name of the establishment where the purchase was made and the value of the purchase. A credit card statement also includes details of other items that are billed to the customer by the bank such as interest charges and fees (annual fees, late fees etc.) and details of all credits including payments made by the customer, any purchase reversals and so on. Credit card statements also provide important information such as the payment due date and a summary of the rewards program associated with the specific credit card. For example, an Air Miles credit card statement would provide details of the Air Miles earned by the customer during the particular billing period and also the overall Air Miles that he or she has accumulated overall. While the details mentioned above are common to almost all credit card statements, banks also utilize the credit card statements to communicate other aspects to customers such as special offers, various payment options, branch locations and so on. Banks also encourage customers to opt for e-statements i.e. statements sent over email as opposed to physical statements that are mailed to customers. E-statements are obviously a much more efficient and environment friendly alternative compared to paper statements and these days many banks actively discourage paper statements by charging customers who opt for physical credit card statements.
Payment Due Date
The Payment Due Date is the date provided by the bank by which the bank must receive at least the minimum payment amount due by the customer. This date is mentioned on the credit card billing statement and is an important date to remember to avoid incurring any late payment charges. Many banks allow for a day or two of “grace” days before levying late payment fees on the card if payment is not yet received. It is especially very important to make the payment before the payment due date if you want to avoid incurring any interest charges. This is in a scenario where a customer makes the total payment due as mentioned on his credit card statement. Banks do not charge interest if the total payment due is made on or before the payment due date. Interest is charged on a credit card on an “Average Daily Balance” method and if the total payment is not received on or before the payment due date then all purchases on the credit card will incur interest charges from the day that they were made until they are cleared by a payment.
If you have a savings or current account with the same bank that issued you the credit card you can setup an automatic payment debit to make sure that payment on the credit card is made directly (and automatically) by debiting your savings account. This payment instruction can be setup for the minimum amount, any pre-specified amount each month or for the total statement amount. This is a very useful tool that customers can utilize to ensure they do not miss making payments before the payment due date and thereby saving them considerable amounts in late fee charges and interest charges.
Most banks these days provide customers with online banking and mobile banking facilities and customers will do well to utilize these services to make their lives simpler and also help save them money. If your savings account and credit card account are with two different banks then you could still set up a monthly auto-debit instruction with your savings bank account to transfer a specified amount of money each month to your credit card issued by the other bank. The main shortcoming of such an arrangement is that specific details of the credit card statement such as the minimum amount due or the total amount due will not be known to your savings bank and hence only a fixed payment can be made automatically each month. However, in such scenarios customers can still utilize the online banking services to make payments on their credit cards with other banks thereby saving them time from having to travel to branches, ATMs or other payment locations.
