Only around a third of millennials say they have a credit card, which is troubling. This fact means that they aren’t compiling a credit score, and will likely run into trouble securing loans in the future.
One of the best ways to establish credit is to open a credit card. Unfortunately, there are a lot of credit card terms you might not understand just yet. Applying for a card can be confusing without a foundation of prior knowledge.
Thankfully, we’ve compiled a comprehensive guide to the most popular credit card terms you’ll come across.
“Credit score” is one of the most important credit terms on this list. It doesn’t only apply to credit cards, but nearly all financial aspects of life.
Financial institutions calculate your credit score based on your credit history. In effect, it’s a history of your loan payments, credit card payments, and current debt.
Those who have never taken out a loan opened a credit card, or otherwise incurred debt have no credit. While this sounds a bit like a positive, it isn’t.
Having no credit is similar to having bad credit. Lenders have no idea whether or not you’re trustworthy. You’re going to have a hard time securing a loan with no credit, and the terms likely won’t be in your favor.
One of the best ways to establish credit is to open a credit card. You’ll likely have a high-interest rate and lack of benefits, but you’ll establish a line of credit for the future.
Once you’ve used less than or equal to 10% of your credit card limit and paid your balances off for a few months, you’ll see your credit score begin to increase. After that, you can start applying for better credit cards and even open a loan if you need one.
APR is part of the credit card terminology you’ll hear all of the time. It stands for Annual Percentage Rate and is just as essential as a credit score is.
Your APR refers to how much interest the credit card company charges you over the course of the year. While they provide the annual percentage rate when you signup for the credit card, the company actually calculates your interest daily.
APR does not include your compounding interest, annual fees, or any other fees you may incur over a year. If you have an unpaid balance on your credit card, the company will compound the interest every day until you pay.
This balance and subsequent interest stay with you until you pay off the entirety of the balance on your credit card.
Although this fact can be a bit disheartening, you don’t necessarily have to worry about interest rates very much. If you’re responsible with your spending and pay your credit card bill every month, interest rates won’t affect you.
It’s only when you carry a balance on your credit card that interest rates start to dig away at your wallet. We suggest staying at a 10% utilization limit and then paying off your credit card balance every month to avoid additional charges.
The billing cycle is one of the simple credit card terms for dummies. This term refers to how often the credit card company sends you a bill.
Credit card providers usually send you a bill every 30 days, though this time frame varies. Some will wait as long as 40 or more days before sending a bill.
While it’s important to know when your billing cycle starts and ends, not all credit card companies are stringent with their time frames.
Check to see if the credit card company allows you to pay your bill on your terms if flexibility is important for you. If this is the case, you can choose when you receive your bill.
Not everyone has the same pay cycle so that flexibility can be a huge benefit. Check with your provider to see if they allow a flexible billing cycle if you’re worried about having enough money in your account to cover a credit card payment.
Almost every credit card offers some kind of rewards program to get people to sign up. You can receive cash back on select purchases, airline miles, loyalty rewards, etc.
Look at the credit card rewards program and see which one benefits you the most. If you’re on the road a lot, for instance, you’ll benefit more from the cash back on gas than you will from grocery purchases.
If you’re still building credit, you shouldn’t worry too much about rewards programs. Some are better than others, but credit for beginners is about establishing yourself rather than getting the most from a credit card.
Once you have an established credit history and good credit score, you can become more selective about which reward programs you prefer.
Our beginner’s guide to credit cards wouldn’t be complete without an annual fee.
Credit card companies charge annual fees that their members have to pay to stay enrolled. Some of these fees are quite high, but they usually come with perks you won’t find with cheaper fees.
Other cards don’t include an annual fee at all. While you might prefer this structure, you probably won’t get too many benefits in return.
Credit card providers use annual fees to supplement the cost of their benefits. If you choose a card with a low or nonexistent annual fee, the advantages of the card probably aren’t as strong as some others.
Those Are the Credit Card Terms to Know
Once you learn these and other credit card terms, finding the right card for you will be a whole lot easier. You won’t need to spend as much time searching around now that you know the buzzwords credit card companies use.
If you don’t qualify for many of the credit cards you want, you probably don’t have a high enough credit score. Take a look at our blog for some helpful tips on repairing your credit score.