10 Credit Terms You Should Know

When you read through offers from a credit provider, you wonder if it’s written in a foreign language. You have no idea what some of the credit terms mean, and you’re afraid to sign up for an account that you don’t understand. 

Don’t worry. You can read this simple guide for credit terms you’ve likely encountered.

1. Credit Limit

Your credit limit is the maximum amount that you are allowed to borrow from your credit account. So, if you had a line of credit for $1500, your credit limit would be $1500. You wouldn’t be able to borrow $1501. If you make charges above your limit, the transactions will not go through. Your provider might also charge you over-the-limit fees. 

2. Default

Default is when a borrower doesn’t follow through with their repayment terms. Providers typically don’t say that a borrower has defaulted if their payments are a few days late. The term is often used to describe payments that have been ignored for long periods of time (for example, several months). If your provider contacts you about defaulting on your loans, and you still do not come up with those payments, it may send your debt to a debt collector.   

3. Grace Period

A grace period is a stretch of time when providers do not charge borrowers interest. With credit cards, borrowers will have a grace period that spans from the beginning of the monthly billing cycle until the bill’s payment is due. Some credit card issuers do not offer their borrowers grace periods.

Credit: Nao Triponez via Pexels 

4. Credit Score 

A credit score is a number that represents a borrower’s credit risk. Whenever you intend to access credit (for example, you’re hoping to apply for a mortgage loan), the provider will run a credit check to see your score. A good credit score lets providers know that you have been responsible with past credit accounts and that you are a low-risk borrower. A bad credit score tells the opposite. You can find out your credit score through your credit report.  

5. Installment Credit

Installment credit is a loan that the borrower receives in the form of a lump sum. They are then expected to repay that lump sum in fixed installments. A common example of installment credit is an auto loan. 

6. Interest Rate

All credit accounts will come with an interest rate. An interest rate is a small percentage of the loan amount that is added to the borrower’s repayments. High-interest rates are often used by providers to incentivize rapid repayments. The longer a borrower takes to follow through on repayments, the more interest will inflate their payment amounts and cause them to owe more.   

7. Maxed Out

“Maxed Out” is a term for when you have used the maximum amount of available credit in an account. So, if you have a credit card with a $5,000 limit, and your outstanding balance is $5000, your card is maxed out. 

8. Minimum Payment

The minimum payment is the minimum amount you can pay a credit card issuer without having your monthly bill counted as late. The minimum amount tends to be a small percentage of the total balance (usually 2% of the balance). 

Paying the minimum is a good way to avoid late fees and recordings of late charges on a credit report. It is not a good way to tackle debts because the minimum is only a small fraction of the total and it will not keep up with compounding interest. 

9. Open Credit

Open credit is a type of loan where the borrower can choose their withdrawal amount, as long as they are within their set credit limit. Their repayments are entirely based on their chosen withdrawals. If they decide not to borrow anything, they do not owe anything. One common form of open credit is a credit card.

10. Revolving Credit

Revolving credit is a type of credit that you can reuse as time goes on, as long as you repay what you borrow. It’s not like a loan that you get to use once and then pay back. You can continue to borrow credit, make repayments and repeat the borrowing cycle. 

One common type of revolving credit is a personal line of credit. If you don’t have a personal line of credit already, you can go to the website CreditFresh to see whether you’re eligible to fill out an application for one. As long as you meet all of the qualifications, you can apply online. You just might get approved!

With this credit tool, you can request a withdrawal inside your credit limit. An approved withdrawal can be transferred directly into your bank account, which you’re then free to use. Afterward, you can focus on repaying what you withdrew through a monthly billing cycle and replenish the credit in the account. Re-use that credit when necessary.

Knowledge is power. Knowing these terms will help you understand credit, whether that happens to be with a credit account you already own or a credit account you intend to sign up for. You’ll know exactly what you’re dealing with.