Credit Card terms which you should know

If you don't understand the language, credit card offers and statements could lead you to deep debt -- or at least furious frustration. For the big scoop on the fine print, here's what these frequently used credit card terms mean.

Average daily balance -- This is the method by which most credit cards calculate your payment due. An average daily balance is determined by adding each day's balance and then dividing that total by the number of days in a billing cycle. The average daily balance is then multiplied by a card's monthly periodic rate, which is calculated by dividing the annual percentage rate by 12. A card with an annual rate of 18 percent would have a monthly periodic rate of 1.5 percent. If that card had a $500 average daily balance it would yield a monthly finance charge of $7.50.

Annual percentage rate (APR) -- A yearly rate of interest that includes fees and costs paid to acquire the loan. Lenders are required by law to disclose the APR. The rate is calculated in a standard way, taking the average compound interest rate over the term of the loan, so borrowers can compare loans.

Balance transfer -- The process of moving an unpaid credit card debt from one issuer to another. Card issuers sometimes offer teaser rates to encourage balance transfers coming in and balance-transfer fees to discourage them from going out.

Cash-advance fee -- A charge by the bank for using credit cards to obtain cash. This fee can be stated in terms of a flat per-transaction fee or a percentage of the amount of the cash advance. For example, the fee may be expressed as follows: "2%/$10". This means that the cash advance fee will be the greater of 2 percent of the cash advance amount or $10.

The banks may limit the amount that can be charged to a specific dollar amount. Depending on the bank issuing the card, the cash advance fee may be deducted directly from the cash advance at the time the money is received or it may be posted to your bill as of the day you received the advance. The cost of a cash advance is also higher because there generally is no grace period. Interest accrues from the moment the money is withdrawn.

Cardholder agreement -- The written statement that gives the terms and conditions of a credit card account. The cardholder agreement is required by Federal Reserve regulations. It must include the Annual Percentage Rate, the monthly minimum payment formula, annual fee if applicable, and the cardholder's rights in billing disputes. Changes in the cardholder agreement may be made, with written advance notice, at any time by the issuer. Rules for imposing changes vary from state to state, but the rules that apply are those of the home state of the issuing bank, not the home state of the cardholder.

Finance charge -- The charge for using a credit card, comprised of interest costs and other fees.

Floor -- The minimum rate possible on a variable-rate loan or line of credit, after any initial introductory rate period. For example, on a credit card with the Prime rate as its index, no matter how low the Prime rate drops, the rate on the line may never decrease below the stated rate floor.

Grace period -- If the credit card user does not carry a balance, the grace period is the interest-free time a lender allows between the transaction date and the billing date. The standard grace period is usually between 20 and 30 days. If there is no grace period, finance charges will accrue the moment a purchase is made with the credit card. People who carry a balance on their credit cards have no grace period.

Minimum payment -- The minimum amount a cardholder can pay to keep the account from going into default. Some card issuers will set a high minimum if they are uncertain of the cardholder's ability to pay. Most card issuers require a minimum payment of two percent of the outstanding balance.

Over-the-limit fee -- A fee charged for exceeding the credit limit on the card.

Periodic rate -- The interest rate described in relation to a specific amount of time. The monthly periodic rate, for example, is the cost of credit per month; the daily periodic rate is the cost of credit per day.

Pre-approved -- A credit card offer with "pre-approved" only means that a potential customer has passed a preliminary credit-information screening. A credit card company can spurn the customers it invited with "pre-approved" junk mail if it doesn't like the applicant's credit rating.

Secured card -- A credit card that a cardholder secures with a savings deposit to ensure payment of the outstanding balance if the cardholder defaults on payments. It is used by people new to credit, or people trying to rebuild their poor credit ratings.

Teaser rate -- Often called the introductory rate, it is the below-market interest rate offered to entice customers to switch credit cards or lenders.

Variable interest rate -- Percentage that a borrower pays for the use of money, and which moves up or down periodically based on changes in other interest rates. By Bankrate.com

How does canceling a credit card affect your rating?

One of the ways cancelling a credit card can affect your credit is as follows: Lenders like to see long, established and stable credit histories. Keeping accounts that are paid in full and not delinquent shows accountability and adds promise that you'll be a stable customers should a lender decide to open and account for you.

On the other hand, opening accounts, running up the balance and then closing them shows a slightly more erratic pattern, and that's likely to scare off creditors.

It's not neccessarily the number of accounts you have on your credit history but the amount of the balances and the payment history.

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It will have a temporary negative affect upon an individual's credit history.

One of the factors that go into your credit score is how much you owe cumulatively verses what your cumulative credit limits are. For example, let's say you have 2 credit cards. On one card you have a $1000.00 limit and you have a $250.00 balance and on another card, you have a limit of $3000.00, and you carry a $750.00 balance. that means cumulatively you have a $4000.00 limit, and you carry a $1000.00 balance, which is 25% of your credit line. Let's say you close the account that has the $3000.00 limit, which cancels that credit line. Assuming you don't pay off that card immediately, and plan to pay it out in installments, now you have a $1000.00 balance, and a $1000.00 credit line, which means you now have a 100% balance to credit line ratio. In that case, your score would go down, at least until you pay down more on your balances. But sometimes, the benefits of closing an account out-weigh the temporary set back on your score. For one thing, you force yourself to behave by limiting how much you can spend. It's up to you what you want to do. Think about it and weigh it out before you act.

How to build your credit history part 4/4

7) Get a finance company card
Gas companies and department stores that issue charge cards typically use finance companies, rather than major banks, to handle the transactions. These cards don't do as much for your credit score as a bank card (Visa, MasterCard, Discover, etc.), but they're usually easier to get.
Again, don't go overboard. One or two of these cards is enough. If you get many more, you may find that later in your life these accounts could prevent you from getting the highest possible credit score. That's not a reason to avoid them completely, because right now they'll do you some good. Just don't apply for half a dozen.

8) Get an installment loan
To get the best credit score, you need a mix of different credit types including revolving accounts (credit cards, lines of credit) and installment accounts (auto loans, personal loans, mortgages).
Once you've had and used plastic responsibly for a year or so, consider applying for a small installment loan from your credit union or bank. Keeping the duration short -- no more than a year or two -- will help you build credit while limiting the amount of interest you pay.

9) Use revolving accounts lightly but regularly
For a credit score to be generated, you have to have had credit for at least six months, with at least one of your accounts updated in the past six months.
Using your cards regularly should ensure that your report is updated regularly. It also will keep the lender interested in you as a customer. If you get a credit card and never use it, the issuer could cancel the account. Just remember the credit tips mentioned earlier:
Don't charge more than 30% of the card's limit.
Don't charge more than you can pay off in a month. As mentioned earlier, you don't have to pay interest on a credit card to get a good credit score, and it's a smart financial habit to pay off your credit cards in full each month.
Make sure you pay the bill, and all your other bills, on time.