5 fundamental credit card terms you should know

If you're a newcomer to credit cards, the terminology and abbreviations can feel overwhelming.

TPG can assist you in clarifying these terms, choosing the right credit card for your needs, and maximizing your points and miles earning and redemption.

In this article, we'll explore some key terms and phrases.

Credit score

First, it's essential to grasp what a credit score is: a numerical representation of your "creditworthiness." Credit scores generally fall between 300 and 850.

Credit card issuers rely on credit scores to assess whether you're a reliable candidate for a new account, as they are extending credit to you. FICO is the primary provider of credit scores used by most lenders. Your FICO score is determined by several factors:

1. Payment history (35%): Over one-third of your credit score depends on how well you've managed your payment obligations in the past. Negative entries such as collections, bankruptcies, foreclosures, or tax liens can severely impact this aspect.
2. Amounts owed (30%): You can still maintain a solid credit score even if you have significant debt. However, it's crucial to keep your credit utilization low on revolving credit cards. Reducing credit card balances is often one of the most effective methods to improve your credit score.
3. Age of credit history (15%): The average age of your accounts, alongside the age of your oldest and newest accounts, influences your FICO score. Older accounts can enhance your score, while newer ones might detract from it.
4. Credit mix (10%): Your credit score may benefit from having a diverse range of revolving and installment accounts on your credit report. Revolving accounts include credit cards and home equity lines of credit (HELOCs), while installment loans encompass mortgages, auto loans, personal loans, and credit builder loans.
5. Credit inquiries (10%): A high number of "hard" inquiries on your credit report within a 12-month period can negatively affect your FICO score. A hard inquiry occurs when you apply for a credit card.

You can access your three credit reports — Experian, Equifax, and TransUnion — for free online once every 12 months at AnnualCreditReport.com. Here are additional ways to check your credit score at no cost. Regularly monitoring your credit report is crucial.

What constitutes a good credit score?

Ideally, aim for a credit score of 760 or above. A score of 760 or higher should ensure you receive the best offers from lenders, including mortgage and auto loans. In the realm of credit cards, a score of 740 may provide access to nearly any card available.

What implications does this have for you?

All the elements that affect your credit score are based on your past activity reflected in your credit report. If you have no active credit accounts, you are considered to have "no credit." With a no-credit score, credit card companies may hesitate to approve your application.

If you find yourself in this situation, the first step is to build credit. If you can't qualify for a standard unsecured account, consider starting with a secured credit card. With a secured card, you'll need to provide a security deposit that matches your new account's credit limit.

The payments made on the secured card are typically reported to the three major credit bureaus. Make sure to verify this with the card issuer before applying.

If you manage your new secured card well by making on-time payments and keeping your credit utilization low, you may qualify for a traditional unsecured credit card down the line. Keep an eye on the scoring factors mentioned earlier to maintain or enhance your credit score over time.

APR

APR, or annual percentage rate, might seem unclear on its own. It represents the interest rate applied to your credit card balance over the span of a year.

Credit card interest is typically calculated on a daily basis — 1/365 of the APR is multiplied by your outstanding balance and added each day. This compounding effect continues as long as you carry a balance. However, if you pay your full statement balance by the due date every month, any interest charged is usually waived.

What constitutes a good APR?

As of May 2024, the average APR for interest-incurring credit cards was nearly 21.51%, according to the Federal Reserve. An APR around 10% is generally viewed as good, while 20% or higher is considered poor. However, rewards cards often come with higher APRs, even for those with good credit. That’s why TPG suggests paying off your balance in full each month.

Many cards feature a low introductory APR — as low as 0%. Ideally, you want to eliminate any concerns about APR by paying off your balance every month.

What does this imply for you?

No interest payments mean no stress over APR. By paying your balance monthly, it effectively becomes a short-term, interest-free loan.

Rewards programs

Now, onto the exciting part. Numerous credit cards provide various types of rewards programs, such as:

• Rewards for an airline or hotel loyalty program
• Rewards for a transferable points program
• Cash back

What constitutes a good rewards program?

A solid rewards program maximizes your spending potential. You can frequently earn up to 5 points per dollar on specific purchases (and sometimes even 10 points).

The estimated cash value of the points varies widely based on the rewards program and how you can redeem them. Our point valuations typically fall between 0.5 to 2.05 cents per point, depending on the program. A higher points valuation means greater value when redeeming your credit card rewards.

What does this imply for you?

The credit card that suits you best depends entirely on your individual circumstances. Look for a card that offers annual travel benefits, complimentary hotel nights, or other perks that match your needs before applying.

You can begin by exploring our top first credit cards or our best rewards credit cards.

Annual fee

Credit cards frequently impose a fee on your account anniversary to cover the rewards they provide. Annual fees can vary from $0 to $550 or more. Generally, the higher the fee, the more substantial the card benefits.

What constitutes a reasonable annual fee?

What does this signify for you?

Naturally, a good annual fee is defined by the perks and bonuses you will actually utilize. For instance, the $95 annual fee (waived in the first year) for the United℠ Explorer Card includes a complimentary checked bag. This fee pays for itself with the savings on checked bags after just one one-way and round-trip flight. Conversely, if you never fly United, that annual fee may not be worthwhile.

It's wise to conduct an annual review of your cards. Your account anniversary is an excellent time to assess the credit card and determine if the benefits justify the fee for another year. Typically, credit card companies provide a grace period of several weeks to request a refund on the annual fee after it has been charged if you choose to cancel your card. However, before canceling, check if the card issuer is willing to offer a credit card retention offer that could waive or reduce your annual fee for the next year.

Credit card, charge card, and debit card explained

A debit card has several distinctions from a credit card.

To begin with, using a debit card for purchases doesn’t involve borrowing money. Instead, funds are directly withdrawn from your checking account, with no credit utilized.

Charge cards operate similarly to credit cards in practical terms. Each time you use a charge card or credit card, it functions as a short-term loan from the issuer. However, with charge cards, you are required to pay off the entire balance each month, without the option for a minimum payment or a lower amount.

Charge cards differ from credit cards in terms of spending limits. While you cannot charge an unlimited amount on a charge card, it also doesn’t have a set limit like a credit card does.

For merchants, there are notable differences in transaction fees across debit, credit, and charge cards. Credit card fees tend to be higher than those for debit cards, while charge card fees are usually the most expensive. However, in the U.S., these fees are seldom directly passed on to consumers.

What does this mean for you?

When making a purchase, choose the credit or charge card that offers the best rewards for that particular category of spending. For instance, the optimal card for dining expenses might differ from the best choice for purchases at office supply stores.

Since banks earn minimal profit from debit card transactions, they usually do not offer rewards for these purchases. Debit cards are great for ATM withdrawals and locations that don't accept credit cards. If possible, opt for a credit or charge card that offers rewards. Just ensure you manage your cards wisely and pay your full statement balance each month to avoid interest charges.

In summary, having a credit card, debit card, and charge card often proves beneficial.

Bottom line

This is just the start of your journey into the credit card universe. Combine this information with our beginner's guide to points and miles, and you'll be set to start accumulating valuable rewards in no time. Once you get going, the possibilities are endless.