Understanding key borrowing terms

The language of borrowing can be some of the most confusing of all. Let's make sure you have a handle on the basics.

How many of the important terms around credit and borrowing do you know?

Annual fee

A yearly charge you’ll pay on only certain credit cards (usually ones that require a minimum income level), regardless of how much you use them. Even companies that use them may not charge an annual fee on every card they offer.

APR

The Annual Percentage Rate is the charge you’ll pay on credit taken over a year – expressed as a percentage of the total borrowed – and includes the basic interest rate plus any monthly or annual charges. In the UK, APR is used throughout the financial industry, making it easier to compare different options.

Balance transfer

When you move (or transfer) the money you owe (the balance) on one card or loan to another credit card. Many providers offer attractive introductory rates to move your money to their card: something like “0% balance transfers for three months”. There’s usually a handling fee, expressed as a percentage of the total. (So, transferring £1,000 with a 4% handling fee would leave you with a new balance of £1,040.)

Credit limit

The maximum amount you can borrow on a card at any one time, whether through purchases, cash advances or balance transfers. If you go over your limit, your card will normally be declined, or sometimes you might be charged extra. Credit limits are set when you apply for your card, but you can ask the card issuer to change it later.

Minimum payment

The lowest amount you need to pay on your credit card balance each month – usually a percentage of the total. If you pay less than the minimum (or nothing at all), you’re likely to be charged. Missing repeated minimum payments can damage your credit rating or even result in legal action.

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