Credit Card Terms you should know

If you are new to using credit cards or have been using one without knowing what a bunch of things mean on the credit card statement, get started here.

• Credit limit

This is the maximum amount of money that you can swipe/borrow on your credit card. It is a pre-stipulated amount that is fixed by the card issuer. If you display good credit behavior, your credit limit may be enhanced by the lender, but do not use it as an excuse to become reckless on your spend. Reckless spending may lead you to penalties and as has been noted in some cases, even account suspension by the bank.

Incidentally, how much of the credit limit you utilize has a large bearing on your Cibil score. Ideally, the utilization rate on your card should not exceed 30% of the total limit that has been allotted to you.

• Cash limit

Don’t confuse the cash limit with the credit limit. The cash limit is the maximum amount of cash that you can withdraw from the ATM using your credit card. Issuers of credit cards often allow cardholders to obtain a maximum amount of cash with their cards where the cash limit is usually a percent of the overall credit limit. This feature makes a credit card similar to a bank debit card. However, the striking difference between the two is that in the case of debit cards the cash belongs to you and is at your disposal whereas in case of credit cards, a very high rate of interest is applicable from the day the cash is withdrawn to the day it is repaid.

Therefore, cash withdrawal through credit cards should be made only in emergency situations.

• Annual percentage rate

The APR is the interest rate charged on outstanding credit card balances outside the due date. APR is expressed in per cent per annum. A common misunderstanding about credit cards is that interest is charged on everything you swipe/borrow through your card. However, the truth is you will be charged for keeping an outstanding balance on your account over the interest-free grace period, which is usually 30-45 days from the payment due date (differs from bank to bank).

So effectively if you pay the entire outstanding amount within the billing cycle, you will never have to pay interest on the money you use on credit.

• Billing cycle

The billing cycle is the time between the credit card bill statements. The billing cycle and credit card statement dates are confirmed to you at the time of the issue of your card by the card issuer. The due date remains the same each month.  Since you already know the due date, it gives you the headroom to plan your credit in a smarter way and avoid making late payments.

• Minimum amount due

This is usually small percent (usually 2-5%) of your total amount outstanding. This is the minimum amount a cardholder should pay within the pay-by date to keep the account from going into default.

• Due date

The due date is the date by which you must settle your credit card bill. If you do not have the funds to do so, then you must at least pay the ‘minimum amount due’. Paying outside the due date will cost you late fee charges as well as get reported on your Cibil report as a negative mark.

Some card issuers allow you to set a convenient date for card payment and others set a standard due date. For payments whose due dates fall on weekends or holidays, the due date would be the next business day.

• Charge-back

Sometimes during online transactions, purchases may not go through for various reasons - including the transaction being non-compliant with the merchant account rules or a dispute by cardholders. In such cases, the amount charged previously on the credit card is credited back to the card holder through a reverse (credit) entry. This is called a charge-back. 

• Late payment fee

A late payment fee is charged when you miss paying the minimum amount due by the payment due date. Late payments may affect your Cibil score negatively even if your entire outstanding balance is paid in full at a later date.

• Balance transfer

It is the process of moving the outstanding credit card balance from one card issuer to another, usually from a high APR issuer to a low APR issuer in order to reduce the interest charges for the cardholder. However, balance transfer also involves payment of fees to the low APR issuer.

• Cash back

It refers to rewards program on your card that return to you (by crediting your card account) a percentage of the total amount spent on your credit card over a specific period of time. This feature can be beneficial only if you use your credit card regularly and pay the entire outstanding amount on your bills every month.

• Card Verification Value

Most popularly referred to as CVV, it is a 3 digit number printed on the back of the card and helps verify the legitimacy of a credit card. The CVV number is essential when making payments online. Since this is sensitive information you must never reveal this number to anyone, including the customer care executive at the bank.

• Chip-and-PIN cards

These cards use computer chips to store and process information instead of, or in addition to, a magnetic stripe. A personal identification number (PIN) is required at the point of sale for the card payment to go through. Similar to CVV, this is also classified information that you should not be shared with anyone.

This article is authored by Rajiv Raj