Finance - Basic Credit Card Terms: What Do They Mean?

If you are like most consumers, you probably haven't read the cardholder agreements for any of your credit cards. And who can blame you? The small print and the legalese those agreements are written in is barely legible. The truth is that credit card companies are hoping you won't read it. They would rather you didn't understand all the terms and conditions of their cards. But understanding the key terms of these agreements is extremely important because they explain how your balance is calculated and what triggers fees or interest rates.

You can save money by understanding the terms of your credit card. This knowledge will help you compare credit cards and know when you should switch to a new card to avoid increasing interest rates or other fees.

Here are a few key credit card terms you should be familiar with:

Preapproval- Most consumers have received offers in the mail stating that they have been "preapproved" for a credit card. This can be very misleading because in reality you haven't been preapproved for anything. In this situation, "preappoved" only means that you have met some initial criteria that indicates you are credit worthy. There is no guarantee that you will be approved for the credit card if you apply, although that seems to be implied.

Annual fee - Many credit cards charge the card holders an annual fee. This may range anywhere from $25 up to several hundred dollars for some premium cards.

Transaction fee- Most credit cards will charge a transaction fee for any transactions other than purchases. The transactions that are often subject to additional fees include cash advances and balance transfers. Some cards will occasionally waive these fees for new card holders as part of an introductory offer. The amount of the fee is usually calculated as a percentage of the transaction, and a minimum fee applies.

Grace period - You can avoid paying finance charges by taking advantage of a credit card's grace period, provided you pay your balance in full before the due date. In contrast, a card without a grace period will begin accruing interest from the day you use the card. However, if the card has a grace period of 20 days, for example, interest will not begin accruing for 20 days as long as the balance was paid in full the previous month.

Wise consumers take advantage of the grace period to avoid paying interest on their purchases while still enjoying the convenience of using a credit card rather than cash.