Basic Credit Card Glossary
Credit card glossary with practical implications
| Term | Definition | Practical Implication |
|---|---|---|
| APR | Annual Percentage Rate: yearly cost of borrowing | 24.62% APR = $2,462/year on $10,000 balance |
| Statement balance | Total charges from the billing period just ended | Pay this to avoid interest on previous charges |
| Current balance | What you owe right now including unbilled charges | Includes charges since statement closed |
| Minimum payment | Smallest payment that keeps account current | Pays almost no principal; generates decades of debt |
| Credit utilization | Balance divided by credit limit | $3,000 on $10,000 limit = 30% utilization |
| Grace period | Time after statement to pay before interest accrues | Pay full statement balance within this period |
| Cash advance | Withdrawing cash from credit card | Incurs fee plus high APR from day one; no grace period |
| Penalty APR | Higher rate triggered by missed payments | Can reach 29.99%; applied to entire balance |
Payment Questions: Statement Balance vs. Current Balance
Q: Should I pay the statement balance or current balance? To avoid interest, pay at least the statement balance by the due date. Paying the current balance (which is higher, including unbilled charges since statement close) eliminates all charges including recent ones. Either avoids interest on the statement balance if paid by the due date.
Q: Is it better to pay twice a month? Yes, modestly. Two payments per month reduce your average daily balance, which reduces the interest that accrues. On a $5,000 balance at 22.99% APR: paying $200 twice a month versus $400 once a month saves approximately $8 to $12 per month in interest. The savings are real but modest. The bigger impact is the total amount paid.
Payoff Strategy Quick Reference
Credit card payoff strategy quick reference
| Question | Direct Answer |
|---|---|
| Avalanche or snowball? | Avalanche saves more interest; snowball provides faster wins. Choose what you will complete. |
| Should I do a balance transfer? | Almost always yes if 0% offer available and balance payable within promo period. |
| Personal loan to pay off cards? | Yes if rate is 8 to 15% vs. 22%+ card rate. |
| Pay cards off before investing? | Yes for balances above 7% APR; 22% card rate far exceeds 7% expected investment return. |
| Close cards after payoff? | No; keep open to maintain available credit and account history. |
| Call for rate reduction? | Always worth asking; 70% success rate for customers with good payment history. |
| How much to pay monthly? | As much as possible; every dollar above minimum saves multiple dollars in interest. |
Credit Score Questions During Payoff
Q: Does paying off a credit card hurt your score? No, it improves it. Payoff reduces your credit utilization ratio and demonstrates successful debt management. The only potential score impact is if you then close the paid-off card (reducing available credit), but this is minor and optional. Q: How fast does my score improve after payoff? The improvement appears within one to two billing cycles after the lower balance is reported to credit bureaus by your issuer.
The One Rule That Covers Most Situations
Pay at least the full statement balance every month you can afford it. When you cannot afford the full balance, pay as much above the minimum as possible. Never pay only the minimum unless there is absolutely no other option. Apply this single rule consistently and you will never accumulate revolving credit card debt and never pay unnecessary interest. It requires one decision made once per month.
Advanced Questions
- Q: Can credit card debt be negotiated down? Yes: call and ask for a hardship program which can reduce APR temporarily. Debt settlement (paying less than owed) is possible but damages credit severely and should be a last resort.
- Q: What is the best order to pay off multiple cards? Highest APR first (avalanche) saves the most money. Lowest balance first (snowball) provides faster psychological wins. Either beats random payment allocation.
- Q: Should I stop contributing to my 401k to pay off credit cards? Never reduce contributions below the employer match threshold. Beyond the match, directing money to credit card payoff at 22%+ APR versus investing at expected 7% return is mathematically correct.
- Q: Can I dispute credit card charges? Yes: under the Fair Credit Billing Act, you have 60 days to dispute billing errors. Contact your issuer in writing with specific information about the disputed charge.
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