Here is an explanation of some of the terms you commonly encounter when dealing with credit cards:
Annual fee: Fee charged by some credit card lenders to cover costs in managing your credit card account.
Annual Percentage Rate: Commonly known as APR. Credit card lenders are required to state their APR to enable borrowers to compare rates. The APR is used to calculate the interest that would be paid by the borrower on the sum borrowed over one year, e.g. if the borrower paid 15% APR on the sum of £500, the APR will be £75 i.e. £500 x 15% = £75.
Balance Transfer: Where borrowers transfer an outstanding balance from one credit card on to another credit card usually because of promotional deals, such as 0% on balance transfers for six months. This enables the borrowers to save on interest payments during that period.
Chip and PIN: Security measure devised to prevent unauthorised use by someone else if a credit card is lost or stolen. The credit card will not work unless the PIN (Personal Identification Number), a four digit number, is known. That’s why credit card lenders implore their borrowers not to keep their PIN on their person but to memorise them instead.
Consumer Credit Act 1974: This is the legislation that includes, as part of its mandate, the regulation of credit cards. One of the chief benefits of the act in relation to credit cards comes under Section 75. This states that the borrower’s credit card lender is jointly liable with the seller of goods and services for any purchases made by a credit card. This means that if the borrower purchases goods and services that prove unsatisfactory he/she can seek financial redress from the credit card company if the seller of goods and services won’t meet his obligations. This is particularly pertinent in a situation where after selling the goods and services, the seller becomes bankrupt. In such a situation the credit card company is under an obligation to ensure that the borrower does not suffer financial loss.
Credit Card: Facility to pay for goods and services without cash. A credit card can also be used to withdraw cash from the cash machine.
Credit Card Cheques: Facility to pay for goods or services without cash when the provider of those goods and services does not accept payment by credit card only because he does not have the credit card machine to complete the transaction. The credit card lender provides you with cheques to overcome this type of impediment. This facility enables you to charge the cost of goods and services to your credit card when the provider of goods and services does not have the means to accept credit cards but is happy to accept credit card cheques instead.
Credit Search: This is the financial history of a borrower compiled by Credit Search Companies such as Experian or Equifax. Credit card lenders will run a credit search against a potential borrower to check how much is owed to other lenders and whether payments have been made on time. Based on this information the credit card lender will decide whether the potential borrower is a good risk and if so set a credit limit.
Credit Limit: This is the amount set by the credit card lender after carrying out a credit search (see above) and credit scoring (see below). Subject to how the borrower conducts his account this amount can be increased or decreased.
Credit Score: A score arrived at by the credit card lenders after analysing the information received from a credit search. The credit score arrived at will determine how much if anything the credit limit will be set at. Each credit card lender will have its own method of credit scoring.
Minimum Payment: Each month the borrower will receive a credit card statement showing the transactions for that month and the total outstanding carried forward from any unpaid balances from previous month/months. The borrower can clear all or part of the balance outstanding but must at least pay the minimum amount specified.
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