Many terms used by credit card companies can be confusing to students.

Credit: Steve Schirra

It comes in an innocent-looking envelope, oftentimes with no warning of what’s inside.

The envelope is ripped open, bearing the message: “Congratulations, you’ve been pre-approved for 0 percent APR until May 2006!”

It’s another credit-card offer, and this one offers a grace period and 0 percent on balance transfers, too. APRs? Grace periods? What does it all mean?

J.P. Desphy, freshman biological sciences major, summed up the feelings of many students when he said, “I know nothing about credit cards.”

Below is a quick reference to some of the most common credit card terms, and Web sites such as www.ftc.gov can help explain terms and answer questions regarding credit cards.

Paying on the card

A grace period is the time between when the bill is sent out and when it is due. If the bill is paid before the grace period is up, the cardholder avoids any penalties such as late fees.

Brad Jones, an adviser at Chase Bank, said grace periods differ from bank to bank.

“Our grace period (at Chase) is 25 days. Some are 15 or 20 ­­–– it just depends,” Jones said. “Make sure you take note of how long yours is.”

The next step is understanding the annual percentage rate. This is the interest the bank can charge if the balance is not paid in full each month. This amount can be fixed or it can vary. A variable APR is based on the state of the economy and can change at any time. Jones said most variable APRs will change once or twice a year.

“If you have a card with a low, fixed APR, keep it.” Jones said. “But some people prefer a variable APR because it could get lower over time.”

Annual fees are another way banks can get money from cardholders. An annual fee is a certain amount paid each year to the lender of the credit card. Jones said there can be perks to having an annual fee, such as reward points for each dollar spent, airline miles or gift certificates. Other times, Jones said, there is a catch, so be aware of what the annual fee will be used for.

Balance transfers

Credit cards provide the ability to pay off other credit cards. An example of this would be taking a Sears credit card balance of $100 with an APR of 22 percent and transferring the balance to a Visa card with an APR of 12 percent. The Sears credit card would then have no balance, and you would only pay 12 percent interest on $100 instead of 22 percent.

Most banks charge a fee for this service. Usually it is a percentage of the transferred balance. Sometimes the bank may offer promotions for new cards that will lower the balance transfer interest.

Penalties

All credit cards have a minimum amount due that has to be paid each month, Jones said. If that amount is not paid within the grace period, late fees will be added to the next bill.

According to bankrate.com, some late fees are as high as $39 per pay period. The easiest way to avoid these fees, Jones said, is to pay at least the minimum amount as soon as you receive the bill.

Sarah Himler, sophomore finance major, said she avoids late fees by keeping track on her calendar when each payment is due.

“I’ve never missed a bill, and I always pay my balance every month.” Himler said. “If I can’t pay it in full, I pay the minimum to avoid fees.”

Jones said good credit is important, and understanding all of the terms before applying for a credit card can help keep a student’s credit rating — described by the Canadian Bankers Association as “reputation for paying back money” — high.

Contact features reporter Erin Hopkins at [email protected].