APR vs APY

Credit card companies are allowed advertise interest rates on a monthly basis (e.g. 2% per month), but are also required to clearly state the APR to customers before any agreement is signed. For example, a credit card company might charge 1% a month, but the APR is 1% x 12 months = 12%. This differs from annual percentage yield, which also takes compound interest into account.

Credit Card Terminology

Understanding the language of credit cards will help you make informed decisions when choosing one. Below is a list of some of the most commonly used credit card terms.

Annual Fee The once-a-year cost of owning a credit card. Some credit card providers offer cards with no annual fees. The annual fee is part of the total cost of credit.

Annual Percentage Rate (APR) The yearly interest rate charged on outstanding credit card balances.

Balance An amount of money. In personal banking, balance refers to the amount of money in a savings or checking account. In credit, balance refers to an amount of money owed.

Credit Bureau A reporting agency that collects information on consumer credit usage. There are currently three main credit bureaus in the United States: Equifax, Experian, and Trans Union.

Credit Line The maximum dollar amount that can be charged on a specific credit card account.

Credit Rating A financial institution's evaluation of an individual's ability to manage debt. It is necessary to have a good credit rating if you intend to borrow money or have credit cards.

Grace Period The time a borrower is allowed after a payment is due to make that payment without adding to the interest owed.

Introductory Rate Credit card issuers may offer low introductory annual percentage rates as special promotions. Be sure to fully understand how long the introductory rate will last and what the standard rate will be.

Minimum Payment The lowest amount of money that you are required to pay on your credit card statement each month in order to keep the account in good standing.

Overdraft Protection A banking service that allows you to link your checking account to your credit card, thereby protecting you from overdraft penalties or bounced checks in the case of insufficient funds.