Our jargon buster is designed to explain some of the terms associated with credit cards:
Annual fee
Some companies charge an annual fee for holding a credit card account. This fee will apply no matter how much or how little you use the card. Not all companies charge an annual fee and those who do so may not charge an annual fee on each individual credit card.
APR
APR stands for Annual Percentage Rate and represents the charge you will have to pay for credit taken over the course of a year. It is expressed as a percentage of the total amount borrowed. It takes into account not only the basic interest rate but any monthly or annual charges. In the UK, APR is used throughout the financial industry, allowing you to compare a range of different financial products and services.
Balance transfer
A balance transfer is when you transfer the money owed on a credit card, store card or loan to another credit card. Many issuers offer attractive balance transfer rates, especially to new customers. These will usually last for a set period of time, just like an introductory offer (see below). There is often a handling fee applied to a balance transfer. This is expressed as a percentage of the total amount transferred. If, for example, you transferred a balance of £1,000 with a 3.5% handling fee, your new balance would be £1,035.
Cash advance
Many credit cards allow you to obtain cash. This can often be done at a cash machine using your PIN, just as you would with your debit card. The APR on a cash advance may be higher than that charged when you make purchases with your card. Additionally, interest free periods may not apply to funds obtained through a cash advance. Interest will usually be charged from the date at which you withdrew the cash.
Cashback
Some cards offer a cashback scheme as an incentive. For every pound you spend, you will receive a proportion of that money back. If, for example, you spent £100 on a card with a 1% cashback, you would receive £1 back.
Contactless technology
Some credit cards now support contactless technology. This allows you to make small purchases (typically £15 or less) by simply holding your card near a contactless reader. The card has to be held for a short time in close proximity to the reader, so you won't trigger a reading simply by walking past.
Credit card
A credit card is a card that allows you to access credit to purchase goods/services or to withdraw cash. A credit card differs from a debit card, which draws from existing funds in your bank account or a prepaid card, which must be 'loaded' with funds before you use it. Whenever you use a credit card you are in essence borrowing money from the card issuer and this money has to be paid back.
Credit limit
Your credit limit is the maximum amount you can borrow on your card at any one time, whether through purchases, cash advances or balance transfers. If you attempt to go over your credit limit, your card may be declined and you may also have to pay charges. Your credit limit will be set when you apply for your card, depending on your personal circumstances and the type of card you're applying for. The credit limit may be revised at a later date.
Foreign Exchange fees
When using a credit card to pay for goods or services abroad, you are likely to incur an administration charge as a result. Unfortunately, this is an unavoidable consequence of using your card while overseas but it is worth noting that these charges will vary from one credit card company to another.
Interest free period
Most credit cards allow an interest free period on purchases. This is a set period of time following the date on which you receive your monthly statement. As long as you pay your balance in full before the end of this period, you will not be charged interest on your purchases. Essentially, this allows you to use your credit card for free if you pay the full balance each month and there are no annual fees. The interest free period does not usually apply to cash advances, balance transfers (which may have their own special rates) or cheques drawn against your credit card account.
Introductory rate
Many credit card companies offer an introductory rate to new customers. This may be as low as 0% and will apply for a set period of time. After this period ends, your outstanding balance will revert to the issuer's normal rates.
Minimum payment
The minimum payment is the lowest amount you must pay off your credit card balance that month. It is usually a percentage of the total amount owed. You can pay more than the minimum payment but if you fail to pay the minimum payment, you may be charged extra fees. Repeatedly missing your minimum payment can damage your credit rating and may eventually result in legal action.
PIN
PIN stands for Personal Identification Number and is the four-figure digit you use to make payments with your card. It is more secure than providing a signature, which can be forged.
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