Glossary of Credit Card Related Terms

Authorized User: An authorized user is a person who is permitted to use a credit card account but is not legally responsible for paying the bill. This is a common scenario for parents who want their children to have access to a credit card for emergencies.

Balance Transfer Fee: This is a fee charged when you move a balance from one credit card to another. It’s typically a percentage of the transferred amount.

Cash Advance Fee: A cash advance fee is a charge that a credit card issuer charges a customer for accessing the cash line on their account, either through an ATM, convenience check, or at a bank’s teller window.

Credit Counseling: This is a service that offers education to consumers about how to avoid incurring debts that cannot be repaid through establishing an effective Debt Management Plan and Budget.

Credit Utilization Rate: This is the percentage of a borrower’s total available credit that is currently being utilized. It’s a key component of your credit score.

Foreign Transaction Fee: A fee assessed by your bank for making a transaction at another bank’s ATM or using your credit card internationally.

Hard Inquiry: A credit report check by a lender as part of a loan or credit approval, often resulting in a small, temporary decrease in your credit score.

Interchange Fee: A fee charged by banks that covers the cost of handling and credit risk inherent in a bank credit or debit card transaction.

Merchant Category Code (MCC): A four-digit number that a credit card issuer uses to categorize the type of business in which a merchant is engaged.

Payment Gateway: An e-commerce application that authorizes payments for e-businesses, online retailers, and ‘brick and mortar’ businesses. It is the equivalent of a physical point of sale terminal located in most retail outlets.

Payment Network: It refers to the system that handles credit or debit card transactions between the merchant and the issuer. Examples include Visa, MasterCard, American Express, and Discover.

Prime Rate: The prime rate is the interest rate that commercial banks charge their most creditworthy corporate customers. Credit card issuers typically set interest rates based on the prime rate.

Promotional Rate (also known as teaser rate): This is a low-interest rate offered by credit card issuers for a specific period to attract new customers or persuade existing customers to use the card more often.

Purchase APR: This is the interest rate applied to purchases made with a credit card. It does not include fees like a cash advance or late fee.

Rewards Points: These are points accrued for making purchases with certain credit cards, which can be redeemed for a variety of rewards.

Soft Inquiry: This is a credit report check that does not affect an individual’s credit score. A lender may perform a soft inquiry to check your credit worthiness before offering you a pre-approved credit card.

Statement Balance: The statement balance is the amount you owe on your credit card as of your last statement. This doesn’t include new transactions or payments you’ve made since your last statement.

Truth in Lending Act (TILA): The Truth in Lending Act is a federal law designed to promote the informed use of consumer credit by requiring disclosures about its terms and cost.

Two-cycle Billing: A method used by credit card issuers to calculate the amount of interest charged for a given billing period when the balance wasn’t paid in full for the previous billing cycle.

Underwriting: This is the process a lender uses to determine if the risk of offering a credit card to a potential customer is acceptable. Most credit card companies have an underwriting department where this process takes place.

Universal Default: A practice among credit card issuers where they increase the interest rate on a credit card if the cardholder defaults on payment with another creditor.

Variable Interest Rate: A variable interest rate is an interest rate on a loan or security that fluctuates over time, because it is based on an underlying benchmark interest rate or index that changes periodically.