The fine print surrounding credit cards is filled with jargon that ends up confusing the average person. Interest rates and billing cycles are easy enough to get, but then you have things such as debt service ratio, overdrafts, and comparison rates.
While the average person might not need to know every single specialised term regarding their credit cards, it would do you well to have at least a loose understanding of most of these jargon.
Here are a few credit card terms that you might come across fairly often:
Annual interest rates
The interest rate on your credit card (e.g. 15% p.a.) is the interest rate you have to pay when you carry over any balance on your credit card over the period of one year. This is the number that’s shown on your credit card agreement, or on a credit card comparison page.
Daily interest
Some credit card issuers may calculate your interest charges on a daily basis. This is calculated by taking your credit card’s annual interest rate divided by the number of days in a year (365), and applying that to your credit card balance.
Effective interest rate (EIR)
Annual interest rates and daily interest rates are the rates you will be paying on paper. In actuality, you might be paying a slightly higher rate. This is your EIR. EIRs are your actual interest rates after taking into account compounding interest over time. To calculate your EIR, divide your total interest owed during a tenure by your total spending. For example:
| Month 1 | |
|---|---|
| Spending | RM500 |
| Interest rate (1.25%/month) | RM6.25 |
| Total | RM506.25 |
| Month 2 | |
| Total carried over | RM506.25 |
| Spending | RM1,000 |
| Interest rate (1.25%/month) | RM18.83 |
| Total | RM1525.08 |
| EIR (Total interest owed/total spending)*100 | (RM25.08/RM1,500)*100 = 1.7% |
As you can see in the above example, interest rate is at 1.25% per month, but EIR is at 1.7% due to unpaid balances from the previous month.
Statement
Your credit card statement will note down all transactions that have taken place over a set period of time. It also shows some crucial information that everyone should be aware of, such as any interest and fees that have been added to, or deducted from, your account.
Pending transactions
These are payments or deposits that you have made with your credit card or debit card, but have yet to be cleared or debited from your account.
APR/comparison rate
APR (Annual Percentage Rate) or comparison rate refers to the combination of interest charged and any additional charges that you will pay on a loan or offer of credit. The APR is very often confused with the interest rate of a credit card. Generally speaking, APR will include the cost you will have to pay if you carry a balance on your credit card. Some credit cards have variable APRs, meaning your rate can go up or down over time.
Direct debit
A very useful system for those who tend to forget to pay bills. This essentially gives a company permission to to take money from your bank account on an agreed date. While the company can change the amount or date, they must send you a notice first. These are commonly used on household utilities or phone bills.
Recurring transactions
Often confused with direct debit. Recurring transactions work similarly as they are payments that you have agreed to, that a business can take from your debit or credit card when needed. They tend to vary in amount and frequency, which can make them harder to keep track of. However, you have the right to either cancel or switch to an easier to manage payment method such as direct debit. Usually, recurring transactions are used for smaller payments compared to direct debit.
Standing order
Another term that can be confused with direct debit. This is an instruction you give to your bank to make a regular, fixed payment from your bank account. For example, you might set up a standing order to pay for your monthly electricity bill. Unlike a direct debit, the amount paid by a standing order is fixed and the only person who can change it is you.
Minimum monthly payment
The minimum monthly payment is the least amount of money a borrower can pay on a revolving credit account each month and still remain in good standing with a credit card company. Just remember that you collect interest on any amount that you’re not paying for that month – so sticking to minimum payments is a good way to find yourself in debt.
Cash advance
A credit card cash advance is a withdrawal of cash from your credit card account. Essentially, you’re borrowing against your credit card to put cash in your pocket. However, there are costs to taking a credit card cash advance. These typically come in the form of fees and higher interest rates.
Automatic balance conversion
Automatic balance conversion (ABC) is a program that is offered by most banks to allow eligible customers to pay off their outstanding credit card balances in a shorter period at a lower rate. This will reduce the overall interest fees to customers. Different card issuers may have different criteria for eligibility.
Finance charges
Any fee you incur from using your credit card is considered a finance charge. Interest, penalty fees, annual fees, foreign transaction fees, cash advance fees, and balance transfer fees are all considered finance charges. Before applying for a new credit card, read the terms and conditions to understand what finance charges you may incur and how your credit issuer calculates each fee.
Interest free period
A credit card’s interest free period is a period in which if full payment is made within that period, the cardholder will not incur interest charges. The most important point to note here is that payment must be made in full. These interest free periods do not apply for partial payments. Most credit cards in Malaysia offer a 20-day interest free grace period for all retail purchases.
Of course, this is by no means an exhaustive list of terms and jargon. However, it would be a good idea to at least be somewhat familiar with such terms if you are going to get a credit card or other lines of credit. The worst thing you can do is sign up for something you do not understand, especially when it involves your finances.
Read More: 4 Common Credit Card Misconceptions You Should Avoid
