Credit Card Glossary: Terms and Definitions for Credit and Credit Cards
Understanding credit and credit card terms can help you choose the right financial products for your personal financial situation.
Credit card basics
A credit card’s annual fee is a yearly fee paid to keep the credit card open.
Transcript: An annual fee is what some card companies charge you to have their credit card, regardless if you use it or not. It’s different from your credit line, which is how much is available for you to spend using the card. The annual fee is an additional amount that you’re charged once a year to keep your account open. Pro tip: Some credit cards don’t have an annual fee so make sure to check before you get a new one!
(Credit card) acceptance
Credit card acceptance is simply whether or not a merchant or online retailer will take your specific credit card as a form of payment.
Transcript: Credit card acceptance is simply whether or not a merchant or online retailer will take your specific credit card as a form of payment. To know whether your credit card is accepted, look for a logo. Not every merchant displays credit card network logos, but that doesn’t necessarily mean they don’t accept cards. Just ask if you’re unsure.
A chargeback occurs when your credit card issuer steps in between you and a merchant to return funds following a transaction dispute.
Transcript: A chargeback is when your bank steps in and forces a merchant to pay you back for a charge rather than you having to request a refund. No, it’s not a position in football, but chargebacks protect you as well as any great defensive team. They look a lot like refunds on your credit card statement, but what’s important is how this type of refund is issued. Chargebacks can act as strong shields between you and a dishonest merchant.
The smallest payment a customer can make each statement period to keep the account in good standing.
Transcript: It’s the least amount of money you can pay toward your credit card balance (the total amount of money you owe the credit card company) each month, and the exact amount is based on the actual balance you carry. It’s usually set at a pretty low fixed amount or a percentage of your balance. So, if you buy 100 pineapples for $100 but your monthly minimum payment is $20, it’s like paying for only 20 pineapples each month. Pro tip: Paying only the minimum payment leaves the remaining balance subject to additional interest.
Being pre-approved for a credit card typically means the card issuer has determined that you meet certain initial criteria that may include credit score and credit history.
Transcript: “You’re preapproved!” Sure, it sounds nice, but wait…what does that mean? It’s not as cut-and-dried as when you were guaranteed a spot on your office dodgeball team.
Being pre-approved for a credit card typically means the card issuer has determined that you meet certain initial criteria that may include credit score and credit history, and it is likely that the issuer will offer you a credit card if you apply. But you have to fill out the application first! Credit card applications may impact your credit score because they result in a “hard inquiry,” but pre-approval offers, which typically include a “soft inquiry” on your credit, don’t impact your credit score and may help you target the cards for which you’re more likely to be approved. Comparing pre-approval offers, including interest rates, rewards and fees can help you assess which credit card makes the most sense for you.
APR (Annual percentage rate)
APR is the annual interest on your account if you carry a balance, expressed as a percentage.
Transcript: An APR, aka annual percentage rate, reflects the true cost of a loan that you’ll pay each year. Let’s break it down: APR is the annual rate charged for borrowing, including any transaction fees or additional costs, and is calculated on an ongoing basis. For example, if you purchased $25 worth of ice cream for the month on your credit card with a 36% APR and did not pay-off the $25 at the end of the month/billing cycle, you would owe and additional $0.74. Small price to pay for those four gallons of mint chip, right? Pro tip: Your credit card company or bank has to tell you what the APR will be before you sign up with them.
Also known as a credit line, a credit limit is the total amount of money that can be charged to a credit card. Carrying a balance close to your credit limit may affect your credit score, which is why it’s important to know your card limit.
Transcript: A credit limit, also referred to as a credit line, is the maximum amount you can charge on a particular credit card. This limit can protect both you and the bank. Let’s say you’re going furniture shopping and your credit limit is $1,000. You see a $5,000 couch you like, but your credit limit means you cannot purchase the couch on your card. Keeping a low balance compared to your limit (called credit-utilization ratio) not only may help you pay your bills in full, but it may also help build a good credit score over time.
An authorized user is someone added to your credit card account. This person will have a credit card in their own name, and have access to the primary cardholder’s line of credit. While an authorized user does not need a credit check, they can make purchases, but they are not liable for making payments. Learn more at Discover.com/AddAUser
Transcript: An authorized user is someone added to your credit card account. This person will have a credit card in their own name, and have access to the primary cardholder’s line of credit. An authorized user does not need a credit check.
An authorized user should be someone you trust, like a friend or family member who is building credit, since you’ll be responsible for any charges incurred. The account becomes part of their credit history, so with responsible use, they can build credit to open their own account in the future. If you plan to add an authorized user, or if you are an authorized user, make sure you have a clear understanding of all responsibilities and expectations before you use your card.
A credit card balance transfer is when you take the balance of the amount you owe from one card and move it to another. You can save on interest payments for that balance if you transfer balances to a credit account with a lower interest rate.
Transcript: A credit card balance transfer is when you take the balance of the amount you owe from one card and move it to another. How could a balance transfer benefit you? Well, if you carry a balance on a high-interest credit card and transfer it to a card with a lower interest rate, maybe even one with a zero percent introductory rate, you will be able to pay down the balance more quickly because you’re paying less in interest charges. But read the fine print. There may be a fee for a balance transfer, and zero percent interest typically lasts for a short time – often just a few of months. After that, you’ll be responsible for the interest, often called the “regular balancer transfer APR.” Make sure you have a plan in place to manage your payments during the introductory period and after.
A cash advance is a feature of a credit card that allows you to borrow cash against your credit limit. In essence, it’s a short-term cash loan you can do at a bank or ATM.
Transcript: A cash advance is a feature of a credit card that allows you to borrow cash against your credit limit. In essence, it’s a short-term cash loan you can do at a bank or ATM. For example, let’s say you’re moving and need cash to tip the movers or buy second-hand furniture. Your checking account is running low and you can’t pay with a credit card. A cash advance can help tide you over for immediate cash needs. But it’s important to read the fine print. Like credit card charges, a cash advance comes with an interest rate, which may be higher than the APR on your card. It may also come with a fee, as well as an additional ATM or bank fee, so consider all the associated costs before you make a cash advance. Pro tip: You may need to set up the feature on your card, so consider setting it up before you need it.
A lower APR offered by a credit card company to new customers for a limited period of time for purchases and/or balance transfers. Once this rate expires, your standard APR/interest rate will apply.
Transcript: An introductory rate on a credit card is a temporary interest rate, or APR, that is lower than what may be offered to current customers. This rate could be as low as 0 percent and is typically offered for a short period of time, often just a few months. But, after that introductory period, the interest rate typically will increase and could fluctuate. While it’s good practice to pay your balance in full every month, if you do have a large purchase, putting it on a card with a low introductory rate means you’ll be paying less interest and will have an opportunity to pay down that balance more quickly. As always, read the fine print and mark your calendar so you’re not surprised when your APR increases.
Credit card rewards
Credit card rewards are bonuses that a credit card company provides its cardmembers for using its card. Popular rewards can take the form of points toward travel or shopping, or cash back incentives.
Transcript: Quite simply, they are ‘rewards’ that a credit card company provides its cardmembers for using its card. Popular rewards can take the form of points toward travel or shopping, or cash back incentives. Credit card rewards can be helpful if you use your card responsibly and pay your bill on time and in full each month. But it’s also important to understand that there may be hidden costs associated with credit card rewards. For example, some reward cards have an annual fee. And if you regularly carry a balance, the interest on your card may make any rewards less valuable than if you had paid your balance in full. Bottom line: Yes, you can get something for simply using your credit card. But, fully understanding the reward program’s structure may help you maximize the rewards you qualify for.
Cash back is a perk that some credit card issuers offer on their cards and refers to the cardmember earning back a percentage of the money spent on that credit card.
Transcript: Cash back is a perk that some credit card issuers offer on their cards and refers to the cardmember earning back a percentage of the money spent on that credit card. Typically, there is a limit on how much cash back you can earn on purchases through promotions or quarterly rewards programs. Cash back earning programs can operate differently from issuer to issuer, so make sure you read the terms and conditions so you can fully utilize your card’s cash back rewards program. There are a variety of ways to redeem your rewards, including a statement credit or bank account deposit. So, your everyday gas and grocery purchases could contribute to that dream vacation. But, it’s important to be smart about your card usage and make sure you make your payments on time each month. Definitely makes your weekly grocery run a little more fun, right?
Travel rewards are the points or airline miles that you can earn for using your credit card for purchases.
Transcript: Travel rewards are the points or airline miles that you can earn for using your credit card for purchases. For example, if you spend $500 on your credit card, you might earn 750 reward miles if your card offers 1.5 miles for every dollar spent on purchases. Before you plan to use your points or miles, make sure you check your credit card for its specific conversion rate. When you look for a travel reward credit card, it’s important to understand how rewards work. While some people use cash back rewards for travel expenses, some credit card rewards are travel specific. Some might only be used for airline tickets, while others may be used for hotels, rental cars, or even converted to cash. With smart planning, you can simultaneously shop for groceries while earning points or miles for a tropical getaway.
Credit & credit scores
Credit score/credit rating
A three-digit number that is calculated by credit bureaus (or any other company) that shows your credit worthiness.
Transcript: Your credit score is like a grade for your creditworthiness. It helps lenders determine how likely you are to pay your loan bills on time. Typically expressed as a three-digit number between 300 and 850, your credit score is calculated based on performance indicators that includes your payment history, length of credit history, total amount of debt and the types of credit on your report. And just like basketball, you should shoot for a high score.
Your credit history takes your past credit behavior, including past loans and history of paying bills on time or late, and is used as one of several tools to calculate your credit score.
Transcript: Think of it as part of a credit résumé for getting a loan. It shows your past loan payment behavior (e.g. credit card, car, mortgage or personal loans, etc.) so banks and lenders can decide whether they should trust you to repay money they lend you. It’s like a sister who always borrows your clothes and never returns them — she has a poor history with you and you probably won’t loan her another sweater. Here’s a hint: Some of the same information that goes into your credit history is also used to calculate your credit score, so the better your credit history, the better your credit score.
A company that collects the credit information of individuals from credit lenders and typically sells that aggregated information to credit lenders in the form of a credit report. The three major national credit bureaus are Experian, Equifax and TransUnion.
Transcript: While it may sound mysterious, a credit bureau is simply a company that collects the credit information of individuals from credit lenders and typically sells that aggregated information to credit lenders in the form of a credit report. Lenders, like credit card companies, utilize credit bureau information to assess a loan application. The three most utilized nationwide credit bureaus are Equifax, Transunion and Experian. The credit scores and reports created by credit bureaus may help a credit card or other financial services company, and even a cell phone provider, assess your credit-worthiness.
The legal process involving a person or business that cannot pay outstanding debts and may include relief from certain debts and/or the establishment or restructuring of debt repayment options.
Transcript: Bankruptcy is the legal process involving a person or business that cannot pay outstanding debts and may include relief from certain debts and/or the establishment or restructuring of debt repayment options. It may sound scary, but it’s important to understand bankruptcy, as well as other debt forgiveness options that may be available if you’re struggling to manage debt. The type of bankruptcy you file determines how long it is on your credit report. A bankruptcy lawyer can be helpful to walk you through how bankruptcy will affect your specific financial circumstances.
In some instances, when faced with significant financial troubles, bankruptcy may not be the only answer. Other options, like debt settlement or even working on a debt repayment plan, may be right for you. Before you decide, talk with a non-profit credit counselor. Understanding your options may help you get on solid financial footing.
Secured credit cards
A type of credit card that requires a deposit as collateral, which affects the credit limit on the card.
Transcript: A secured credit card requires you to put down a security deposit. Depending on the card, you may be able to choose the deposit amount up to the credit line you want to be approved for. So, if you put in $500, then you’ll have a $500 monthly limit. The idea is that you’ll start building a solid credit history, which will make you appealing to lenders in the future — plus you’ll look like a total boss with a real credit card in your pocket. That’s pretty sweet!
Cash flow is the amount of cash coming in and going out of your business. In a positive cash flow, more money is coming in. In a negative cash flow, more money is going out.
Transcript: You know the saying: “You have to have money to make money?” That may be especially true in a small business. Cash flow, helps determine your liquidity, or the cash your business has readily available. Cash flow can be negative or positive. Positive cash flow is when cash inflows are higher than outflows. Negative cash flow is the opposite. More money is leaving your business than is coming in. A positive cash flow makes it easy to pay vendors, make payroll, and handle emergencies. But remember: cash flow is NOT the same as profit. And a negative cash flow doesn’t mean your business is failing. But you may need to tweak your strategy. For example, is there a way to ensure customer’s pay promptly so you know when cash will come in? Creating a cash flow log can help you see patterns, and may point to some simple fixes, such as making sure clients pay promptly or changing inventory strategy.
When you’re just starting out, you may need to rely on a credit card or a personal loan until your cash flow evens out. Make sure to assess interest rates charged on products and account for interest in making a budget. And seek out support. Other business owners and mentors may have smart cash flow strategies to share. Bottom line: Don’t let cash flow get in the way of your success. Set up strategies that work and stick to them.
Limited Liability Company (LLC) limit
A Limited Liability Company (LLC) is a type of business structure that can protect your personal assets and make it easier to separate your business and personal expenses.
Transcript: When you start a small business, you may find people asking if you’re a Limited Liability Company, i.e. an LLC. Even if your small business is a solo endeavor, there may be benefits to setting up and operating an LLC. One benefit: Your personal assets can be protected from business debts. If your business were sued, your personal assets, such as your savings and your house, may be safe.
An LLC can also make things simpler come tax time. LLC owners can report their share of the business profits on their individual tax returns. And an LLC can allow you to build credit for your business. This can help you obtain a business loan or a business credit card, which can also protect your personal assets. But an LLC may not be the right fit for everyone and is not available in every state. For example, certain tax treatments may make it challenging for investors to invest in LLCs. Knowing your business needs can help you assess whether an LLC is the right choice for you. And setting up your business under the proper business structure can help ensure business success.