You’re considering applying for a brand-new credit account, but you’re feeling hesitant. You don’t know what most of the terms mean, and you don’t want to jump into a commitment that you don’t fully understand. To help you make an informed decision, look at the meanings of these three common credit terms.
1. Line of Credit
A line of credit is a type of loan. A bank or loan provider will give you access to a predetermined amount of credit. You can make withdrawals from this amount of credit, as long as it’s within the boundaries of the credit limit. After the withdrawal, you will need to make repayments.
What separates a line of credit from other loans is that it can be reused. It’s not a one-time loan. You can borrow and repay the funds and then borrow them all over again. This is why it’s called “revolving credit.”
How can you get a line of credit? If you don’t have an account already, you can try to get access to a line of credit online — as long as you meet all of the eligibility requirements to apply. If you’re eligible, you can fill out and submit an application quickly. You’ll soon find out whether you’ve been approved for the credit tool or not.
Another common way to get access to a line of credit is through a credit card. With a credit card, you can charge expenses to the line of credit, which will become your outstanding balance. Then, you will have to pay down that balance through a monthly billing cycle.
2. Cash Advance
A cash advance is a type of short-term loan from a bank or loan provider. A withdrawal from a line of credit is often considered to be a form of “cash advance.” It allows you to convert credit into liquid funds that you can use to pay off certain expenses, for example, an emergency appliance repair.
Credit card companies also allow their clients to request cash advances. In this circumstance, the client can request to borrow a certain amount from their card’s line of credit and use it as a cash loan. If their request is approved, the client will have to pay a cash advance fee. Their loan will also not go through a grace period like their usual credit card transactions. This means the issuer will charge them interest from the moment that they make the withdrawal.
3. Minimum Payment
The minimum payment is the smallest amount that you can pay on your monthly credit card bill for it to be considered paid by the credit card issuer. If you pay less than the minimum, your bill payment will be considered late. You will be charged a late fee and potentially other penalties by your issuer.
Paying the minimum is an effective way of avoiding late fees, especially when you can’t afford to pay down more of your balance. However, it’s not a great financial habit to keep up with. The minimum payment is far too small to put a dent in your credit card’s balance — it could be as little as $25.
The minimum payment is also too small to combat compounding interest. Remember — the average interest rate for a credit card is quite high. That interest rate can easily make your outstanding balance grow every single month that it’s not paid down. Eventually, that balance could creep closer to the limit, which puts you at risk of maxing out your account.
So, you should only use the minimum payment when absolutely necessary. Don’t make a habit of it.
These are just some of the credit terms you should know. Learning these should make using credit accounts that much easier.