Reaching for the plastic this holiday season?

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.

Jessica Horton is a former copywriter and community manager at MMI.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.