Before we get into shopping for a card, let's go over some important terms you'll encounter in credit-card brochures or discussions with potential lenders:
- Annual fee - A flat, yearly charge similar to a membership fee
- Many companies offer "no annual fee" cards today, and lenders who do charge annual fees are often willing to waive them to keep your business.
- Finance charge - The dollar amount you pay to use credit
- Besides interest costs, this may include other charges such as cash-advance fees, which are charged against your card when you borrow cash from the lender. (You generally pay higher interest on cash advances than on purchases -- check your latest bill to find out what you're paying for this service!)
- Grace period - A time period, usually about 25 days, during which you can pay your credit-card bill without paying a finance charge
- Under almost all credit-card plans, the grace period only applies if you pay your balance in full each month. It does not apply if you carry a balance forward. Also, the grace period does not apply to cash advances.
- Annual percentage rate (APR) - The yearly percentage rate of the finance charge
- Interest rates on credit-card plans change over time. Some of these adjustments are tied to changes in other interest rates, such as the prime rate or the Treasury Bill rate, and are called variable-rate plans. Others are not explicitly tied to changes in other interest rates and are called fixed-rate plans.
- Fixed rate - A fixed annual percentage rate of the finance charge
- Variable rate - Prime rate (which varies) plus an added percentage (For example, your rate may be PR + 3.9 percent.)
- Introductory rate - A temporary, lower APR that usually lasts for about six months before converting to the normal fixed or variable rate (This is a hot topic -- more about it later.)