Credit card use is increasing, according to recent reports. In fact, for the first time since 2008 more consumers are choosing to use a credit card over a debit card. Reports also show that credit card solicitations sent through the mail have increased 85 percent since 2010.
Although using a credit card for purchases – especially those big holiday purchases – can be rewarding in the form of airline miles and cash back bonuses, it’s important to be smart when reaching for your card. So if you’re one of those people whipping out the plastic this holiday season, take a few minutes to brush up on these key credit terms:
- Annual Percentage Rate (APR): The yearly amount (expressed in a percentage) that is charged for borrowing from a lender. Each billing period, the company will charge a fraction of the yearly amount, which is known as the periodic rate.
- Average Daily Balance: The average daily balance is determined by adding each day’s balance and then dividing that total by the number of days in the billing cycle. This is a method used by many creditors to calculate interest charges.
- Collateral: Property or goods used as security against a loan and subject to seizure if the loan is not repaid. Houses and cars are common forms of collateral.
- Compound interest: Interest that is charged on previously accrued interest in addition to the initial amount owed.
- Default: Failure to make a payment on a debt by the due date, which can result in increasing interest rates and even legal action.
- Delinquent account: An account that is past-due.
- Late charge: The fee charged to a borrower who hasn’t paid at least the minimum payment on a debt by the due date.
- Minimum monthly payment: The lowest amount of money the borrower must pay in order to keep the loan current. For credit cards, this amount is generally 2 to 4 percent of the balance and doesn’t always cover the interest due.
- Principal: The initial amount of money that was borrowed.
- Secured vs. unsecured debt: Secured debt is secured by collateral (such as a mortgage, which is secured by the home), while unsecured debt is not linked to an asset.
Keep in mind that it’s important to always pay your bill on time – and be careful when carrying a balance on any credit card. If you must carry a balance, make sure you have a solid plan in place to ensure you can pay off your debt within a reasonable amount of time in order to avoid paying too much in interest.