University of Illinois Extension

Credit Card Terms

Annual Fee: is a charge paid once a year for the right to use a credit card.

Annual Percentage Rate (APR): is the annual interest rate that the card issuer charges on the unpaid balance of the credit card or loan.

Average Daily Balance:a method used to determine finance charges. It is based on the average balance that existed each day. The calculation includes new purchases and payments.

Balance Transfer: is a process of moving an unpaid credit card debt from one issuer to another card, assuming the newer card has better terms and rates. Card issuers offer teaser rates to encourage cardholders to change credit card companies and charge balance transfer fees to discourage them from changing card companies.

Borrower: is a person who either applies for, or receives a mortgage or loan. A borrower must have the intent and ability to repay the loan in full, plus interest.

Cash-Advance Fee: is a charge for using credit cards to obtain cash. The fee is expressed as both a percentage and a flat dollar amount. There is no grace period for a cash advance, meaning that interest is charged from the moment the cash is withdrawn.

Collateral: is the asset that is pledged by a borrower to secure a loan or other credit, and subject to seizure in the event of default. It is also known as security.

Credit Card: is a card that may be used repeatedly to borrow money or buy products and services on credit. It is issued by banks, savings and loans, retail stores and other businesses.

Credit Rating: is a judgment of someone's ability to repay debts, based on current and projected income and history of payment of past debts. It is sometimes expressed as a number called a credit score.

Credit Reporting Agency (CRA), formerly called Credit Bureau: is a company that collects and sells information about how people handle credit. CRAs issue credit reports that list how individuals manage their debts and make payments, how much untapped credit they have available, and whether they have applied for any new loans. The reports are made available to individuals and to creditors who have a legitimate need for the information. The major national credit reporting agencies are Equifax, Experian, and TransUnion.

Credit Risk: is the probability that a borrower will repay a debt.

Creditor: is a person or business to which a debtor owes money.

Debtor: is a person who owes money to others.

Default: is failure to meet the financial obligations as agreed. People who do not make payments on a loan have "defaulted" on that agreement.

Equity: is the value of property beyond the total amount owed on it.

Finance Charge: is the total dollar amount a consumer pays to use credit, including interest costs, service charges, and insurance.

Fixed Expense: is an expense that cannot be adjusted or eliminated, such as a monthly car or mortgage payment.

Fixed Interest Rate: is a rate that stays the same for the life of the loan.

Flexible Expense: is an expense that can be adjusted or eliminated, such as luxury items, clothes, or entertainment.

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