Credit cards: the essential terms finally explained

Whether you're looking to buy a new card or keep track of your existing one, here are the key terms you need to know to manage your credit cards.

APR – Annual Percentage Rate

The APR, or annual percentage rate, is the way to compare the cost of loans. It allows you to compare the cost of loan products on a "comparative" basis. The credit card company must disclose the APR before you agree to use the card. To calculate the APR, the interest rate and fees are compared to the amount you borrow and calculated over a year. This allows you to compare the costs of a credit card with those of a six-month loan. It's also the reason why APRs are often different from simple interest rates.

Balance transfer

A balance transfer allows you to transfer an outstanding balance from one credit card to another, sometimes in exchange for a fee. The fee is usually a fixed amount or a certain percentage of the transferred amount. Credit card companies may offer zero- or low-interest balance transfers—for a limited time—to encourage you to consolidate your debt onto a single credit card. Afterward, the interest rate on your new credit card may increase, increasing your payments.

Credit balance

A credit balance is an amount the card issuer owes you. Every time you make a payment, a credit is added to your account. Credits can also be added when you return something you purchased with a credit card, or because of rewards you've earned, or because of an error on a previous bill. When the total credits exceed the amount you owe, your statement shows a credit balance.

Credit Card Interest Rates

The interest rate on a credit card is the price you pay to borrow money.

Daily interest

Some card issuers calculate account interest using a daily periodic interest rate, which is used to calculate interest.

Grace period or dead period

A grace period is the period between the end of a billing cycle and your payment due date. During this time, you cannot be charged interest as long as you pay the balance in full by the due date.

Rate of interest

A credit card's interest rate is the price you pay to borrow money. Interest rates are usually expressed as an annual percentage rate, the annual percentage rate (APR). On most cards, you can avoid paying interest on purchases if you pay your balance in full each month by the due date.

Pre-selected credit card offer

A pre-screened credit card offer is when credit card companies use information from credit reporting agencies to make you firm credit offers if your credit history meets the criteria selected by the card company.

Unauthorized use

In general, unauthorized use is the use of a credit card by someone who does not have the right to use it.