Credit Card Guides

Credit card terms explained

Here we’ve categorised some of the important terminology used regarding credit cards.

Credit card terminology:

Monthly statement: Sent out every month and details all transactions on the card for the previous month, as well as listing when the repayment or balance clearing for that month is due (usually 3 weeks later). Also shows the minimum repayment needed to avoid charges.

Annual fee: Certain cards offer a range of benefits in return for spending, which is particularly the case for cashback and rewards cards. This fee could be as high as a couple of hundred pounds, so it’s important to weigh the benefits of the perks vs the annual cost.

Card issuer: The card issuer is the company or bank providing the card, e.g. NatWest. It is important to know this does not refer to the type of card, e.g. Visa or MasterCard.

PIN: The important security code needed to use the card, never share it with anyone as a rule.

Credit limit: A variable amount (set when you first get the card but liable to increase over time) that determines how much you can spend or owe without incurring extra charges.

Credit score or credit rating: This is based on your lending history and is recorded by companies such as Equifax and Experian. It’s important in determining which cards you will be eligible for, and also how much APR you will pay once your application is accepted. This of course changes over time and can be increased with good repayment practices.

Minimum payment: The amount you need to pay monthly to avoid charges. This will be set regardless of how much you owe, and it’s important to know that even if you keep making the minimum repayment it could still take a long time to pay off the debt as existing interest can keep accruing.

Balance: The outstanding amount you owe of the credit card based on fees, charges and amount spent.

Interest: The charge or fee levied by the bank or card issuer based on how much you owe and how long it is owed.

Available credit: This is how much you can currently spend and remain under your limit; it is calculated as the limit less the amount of outstanding fees and charges on the card.

APR (Annual Percentage Rate): While there are different types of APR (basically there is a difference between the advertised APR and the APR you are actually offered when your credit card application is successful), this is the rate of interest per year you are charged on any amount that remains outside of an interest-free period. Nearly all cards have at least a month of an interest-free period for most transactions (which can be longer in the case of e.g. a balance transfer), however certain transactions such as cash withdrawals start to accrue interest immediately.

Legal institutions, agencies, charities and Acts:

Consumer Credit Act 1974 (CCA): Outlines the legal payment protection offered by credit cards and what safeguards are in place to protect customers. It had a major update in 2006 which had a large effect on payment protection

Consumer Credit Directive 2011 (CCD): A Directive put in place to bring clarity to the application process for credit cards.

Financial Services Authority (FSA): The official Authority that is in charge of regulating the UK financial services industry.

Debt Advice Foundation, StepChange: Two of the number of debt advice charities.

Action Fraud: The police agency to assist with credit card fraud.

Types of card:

Store cards: Offer rewards that can be redeemed in a certain store or outlet for shopping there. Often offered by the business itself.

Debit card: Similar to a credit card, but it only allows you t pay with the money in your bank account. Useful for online purchases similar to a credit card, but does not offer the same protection.

Money transfer card: In exchange for a fee, these cards allow you to transfer money from your card to your bank account, making them useful as a source of cash.

Cashback credit cards: In return for making certain kinds of transactions (usually purchases), you will be given an amount back in cash. Very suitable for those that always pay their balance each month, as they can have high interest fees in the event of not repaying each month.

Rewards cards: Similar to cashback cards, except the benefits they offer are typically tied to a certain outlet or merchant. While the amounts gained are typically higher than with cashback cards, the downside is that there is less flexibility in how you can redeem the reward.

Credit builder cards: These are a good option if you don’t have a high enough credit rating for some of the cards with higher application requirements. While they have a higher APR than others, they can be used to increase your credit rating over time and have lower entry requirements.

Balance transfer card: Ideal if you want to bring a credit card debt under control from another card. These allow you to transfer the balance to the new card and avail of an interest free period where the debt is essentially frozen and no new fees accrue. This enables you to pay off the debt and get it under control in return for paying a fee on the amount owed.

Contribution or Affinity cards: These are offered in partnership with an organisation or charity and each time you use the card an amount is donated to that organisation, making them a great way to support a cause while spending.

Purchase cards or 0% purchase credit cards: Purchase credit cards are ideal if you have a big spend coming up that you want to fund without having to save up front or pay interest on a loan. They can be a very cheap way to get credit for a large purchase like a kitchen renovation or expensive electronics. The amount debited to a 0% purchase credit card will not accrue interest at all in the interest-free period, so it functions as an interest-free short-term loan.

Other terms

Interest-free period: For certain cards (such as balance transfer and purchase cards) an interest-free period is offered during which you can repay the amount without interest accruing. It is important to repay within this timeframe as the interest rate can be high when it ends.

An interest free period also applies to standard cards: this is when you have made the transaction but your monthly bill due date has not passed, so you have been able to make this expenditure on your card without having to pay any interest on it.

Promotional rate: This is an interest rate that is offered by the issuer or bank for an introductory period, after which a standard rate of interest will start to take effect.

Statement date: This is the date that is the last day of a given monthly billing cycle, and transactions made before this date will show up on the month in question’s statement while transactions made after this will be included on the next month’s statement.

Payment due date: This is the deadline before which you need to pay the previous month’s minimum repayment to avoid charges and potential impacts on your credit score.

Cardholder: The main cardholder is ultimately responsible for the credit card and any debts incurred regardless of who uses the card. Joint account holder setups are also possible, where both people listed as account holders have equal authorities and responsibilities regarding the card. An authorised user doesn’t have responsibility or authority for the card, but is named as someone who can use it.

Payment protection insurance: This insurance can help if you find yourself unable in the long or medium term to make your repayments due to unforeseen circumstances. The insurance company will assist in resolving debts and minimum repayments, but of course like all insurance you must pay a premium for this protection.

Currency conversion fees, foreign transaction fees or foreign purchase fees: One of the main drawbacks to using your card abroad, these fees are levied on any purchase or transaction you make outside of the country. Overseas spending credit cards have lower or no fees in this regard in some cases.

Balance transfer fee: As mentioned above, balance transfers are a great way to get spending under control. However, they come with a fee, a percentage of the amount transferred.

Cash withdrawal or cash advance: If you withdraw cash from an ATM you will be charged a fee on the amount withdrawn and also any interest on the amount will start to accrue immediately.

Adverse credit: Another term for a bad credit history, this is were your credit score has been lowered due to previous debts and lending.

Default: You should avoid default where possible in order to protect your credit score. Default is when the credit card service is terminated by the bank due to excessive amounts owed or failure to meet the terms and conditions.

Temporary authorisation: This is a transaction that has not taken full effect on your account but has been approved. It usually takes a number of days for this to turn into a posted transaction. In the meantime, however, this amount is deducted from your available credit. This payment feature is used also in the case of services that you have essentially put a deposit down for (such as hotel room expenses) that will then be cancelled by the merchant in the event that you did not avail of them, stopping them from becoming authorised transactions.

Credit card cheque: Similar to a cash withdrawal, this is where you use your card to write a cheque. Just as with a regular cheque, this is then debited from your account. They have costs involved, such as interest being levied immediately (no interest free period) as well as a percentage charge.