If you simply glance over your credit card statement each month and do not pay attention to many of the common terms listed, you may be missing out on valuable information. For many, credit card terms seem relatively unimportant until you consider how much money you may be saving by fully understanding the depth of your card, purchases and billing. The following terms are a must-know for anyone dealing with multiple credit cards and will help clarify to you some of what may not currently make sense.
Average Daily Balance
This unit of measurement is the method by which credit card companies calculate your interest rate. Typically, credit card companies will calculate your average daily balance by adding up the total for each day in your billing cycle and then dividing it by 30. This gives the average daily balance of the debt currently on the card. For example, a card with 12% APR would be calculated at 1% interest per month; on a $1,000 average daily balance, this would equal $10 in interest charges for a given month.
For those who have no debt on their credit cards and pay their expenses off month to month, the grace period is the amount of time between the purchase and your billing cycle end. Generally speaking, the grace period runs from 20-30 days. If you have existing debt, there is no grace period allocated and some cards do not offer grace periods even if you have no debt; they will begin charging you as soon as you make the purchase.
Virtually all of us have received offers stating that we are pre-approved for a new credit card, but what does it mean? Typically, pre-approval is the process where a company has already evaluated your credit on a general basis based on public information. For those who pass muster, an “invitation” is sent out to alert them that credit may be available through the specified lender.
Variable Interest Rate
Many people believe that their interest rate will stay the same, but any reference to a variable interest rate would speak otherwise. Variable interest rates are tied to an industry average known as the Prime Rate and can fluctuate depending on the economy, available credit on the market and much more. If you have good credit, there is no reason to carry a card with a variable interest rate.