Personal Finance 3.01 Credit Cards

Credit

Allows individuals and businesses to purchase goods, services, or capital immediately while deferring repayment to a later date.

Total Cost of Credit

Equal to the original principal plus all interest, periodic charges, and administrative fees incurred over the life of the debt.

Revolving Credit

An open-ended line of credit up to an approved limit, such as credit cards, where balances can roll over monthly.

Installment Credit

A fixed lump-sum disbursement repaid through fixed amortizing payments over a scheduled duration, such as auto loans or mortgages.

Secured Debt

Debt backed by borrower collateral, which reduces lender risk and can lead to lower interest rates.

Unsecured Debt

Debt that is not backed by collateral, presenting higher risk to lenders and higher rates to borrowers.

Credit Score

Scores ranging from 300 to 850 that assess credit risk, determining approval eligibility and credit limits.

Minimum Payment Compounding

Paying only the monthly minimum prolongs debt repayment, drives exponential compounding of interest, and increases total borrowing costs.

Promotional Financing Risks

Offers with '0% promotional interest' may include deferred-interest terms that charge retroactive interest if not paid in full before the period ends.

Principal (P or L)

The original amount borrowed or financed before interest and fees accrue.

Annual Percentage Rate (APR)

The standardized annual cost of borrowing expressed as a percentage, including interest and required financing fees.

Periodic Interest Rate (r)

The interest rate applied per billing cycle, calculated as APR divided by 12 for monthly billing.

Amortization

The scheduled repayment framework where fixed periodic payments are split between accrued interest and principal reduction.

Grace Period

The interest-free window (typically 21 to 25 days) post-statement close where paying in full avoids interest on new purchases.

Schumer Box

A standardized disclosure table summarizing interest rates, variable rate benchmarks, grace periods, and fee structures.

Variable APR

An interest rate that adjusts periodically based on external benchmarks.

Fixed APR

An interest rate that remains constant unless specified contractual terms permit rate revisions.

Penalty APR

A high interest rate triggered by late payments or violations, remaining in effect until consistent on-time payments are demonstrated.

Average Daily Balance

The standard method for calculating interest where the issuer computes the average balance over the billing cycle.

Monthly Periodic Rate

Calculated as r = APR / 12, it represents the interest charged per month.

Fixed Amortizing Monthly Payment (M)

Calculated using the formula M = P * [r(1+r)^n] / [(1+r)^n - 1], representing the monthly payment necessary to amortize a loan.

Total Repayment

Calculated as Total Repayment = n * M + Fees, representing the total amount paid including payments and additional charges.

Finance Charge

The cost of borrowing on a loan calculated as Finance Charge = Total Repayment - Principal.

Minimum-Payment Trap

The scenario where financing a small balance at a high interest rate with low payments results in extended repayment time and high total interest.

Cash Advances

Credit card withdrawals that accrue interest immediately, apply higher interest rates, and incur transaction fees.

Full-Balance Payers

Credit card users who focus on cards with $0 annual fees and high-value rewards due to not carrying a balance.

Revolving Borrowers

Users who prioritize cards with low ongoing or promotional APR rates and low fees to minimize long-term costs.