A
Affinity Card- A card that is offered jointly by two organizations. One is a credit card issuer and the other is a professional association, special interest group or other non-bank company. For example, Citibank and American Airlines sponsor the Citibank AAdvantage card.
Amortization- The process of fully paying off indebtedness by installments of principal and earned interest over a definite time. Appraisal Fee The charge for estimating the value of property offered as security. Annual Fee A yearly fee charged to the card for keeping the account open. Some cards have this fee and some do not.
Annual Percentage Rate (APR)- The cost of carrying a balance on a loan expressed as an annual percentage. To calculate the amount owed in interest each month divide the APR by 12. For example, if the APR is 18% the monthly rate is 1.5%. Asset Anything owned by an individual that has a cash value. This includes property, goods, savings or investments.
Average Daily Balance- The average daily balance is a method used to calculate finance charges. It is calculated by adding the outstanding balance on each day in the billing period, and dividing that total by the number of days in the billing period. The calculation includes new purchases and payments.
Additional principal payment- If you want to pay off a loan early, an additional principal payment is the way to do it. In amortized loans, such as most mortgages and auto loans, most of the early payments go toward principal. Making at least one extra payment a year can cut the length of a loan by as much as a quarter and sharply reduce the total interest paid.
Adjusted balance- Some card issuers will use this method in which they subtract all payments made during the month, then add the finance charges.
Affirmation- An agreement under which a debtor continues to pay debts that could have been discharged (done away with) by bankruptcy. Usually used to keep a car during the bankruptcy process.
Arbitration- An attempt to resolve a dispute using a neutral third party. By making arbitration a condition of the loan contract, many lenders impose arbitration on consumers.
Asset case- When, during bankruptcy, you have enough nonexempt assets to go after, the lawyers will tell your creditors they have an asset case.
Assets- Personal possessions of value. It can include cash, real estate and investments. In bankruptcy proceedings, some assets are exempt from claims by creditors, some are not.
Authorized user- A given permission to use a credit card account.
Automatic stay- Some court filings, including some bankruptcy petitions, trigger an immediate injunction that stops other legal activity. In bankruptcy, an automatic stay puts an end to attempts to collect debts.
B
Bad Credit- A term used to describe a poor credit rating. Common practices that can damage a credit rating include making late payments, skipping payments, exceeding card limits or declaring bankruptcy. “Bad Credit” can result in being denied credit. Balance The total amount of money owed. It includes any unpaid balance from the previous month, new purchases, cash advances, and any charges such as an annual fee, late fee or interest. The balance should not be confused with the monthly payment (the minimum payment allowed each month), which is generally 2% – 5% for revolving credit cards.
Balance Transfer- Moving a balance (debt) from one credit card to another. This is often done with special checks or forms, or may be offered as an option on some credit card applications. The usual reason is to shift an ongoing debt to an account with a lower interest rate. Balloon Payment A large extra payment that may be charged at the end of a loan or lease.
Bankruptcy- Bankruptcy is a legal declaration of the inability to repay debts. Bankruptcy should be viewed as a last resort. It will have a severe impact on a credit rating and will remain on a credit report for ten years. Furthermore, bankruptcy is not a solution in all cases. Federal student loans, Federal tax debt and child support are all exempt from bankruptcy protection. Bankruptcy agreements vary but there are two types of agreements that most people choose: Chapter 7 and Chapter 13.
Chapter 7
In a Chapter 7 agreement, the court resolves most debts by selling assets and property so that the filer is given a fresh financial start. The court takes all assets including cars, homes, furnishings, jewelry or anything else of value. The assets are sold to pay off the debt. There are some debts that a person may wish to repay on their own instead of having the court resolve it. This is called reaffirmation. Reaffirmation is a special payment plan with the court. For example, if a car loan is reaffirmed, the person keeps the car and makes payments under new terms. Chapter 7 bankruptcy will not eliminate debts due to taxes, child support, alimony, student loans, court fines or personal injury caused by driving drunk or under the influence of drugs. A Chapter 7 filing will remain on a credit report for 10 years.
Chapter 13
In a Chapter 13 agreement, the court creates a debt repayment plan that allows the filer to keep their property. In order to file Chapter 13, a person must have a source of income and promise to pay part of their income to creditors. The court allows the filer to keep any assets that have debts against them if they pay them off under terms determined by the court. A Chapter 13 filing will remain on a credit report for 10 years. With Chapter 13, there is a better chance of obtaining future loans and credit.
Billing Cycle- The number of days between statement dates. This is generally about 25 days..
Buydown- A lump sum payment made to the creditor by the borrower or by a third party to reduce the amount of some or all of the consumer’s periodic payments to repay the indebtedness.
Bad debts- Money owed that can’t be collected. Businesses will write off or charge off bad debts from their books, but that is an accounting procedure, and does not necessarily end attempts by a business to collect bad debts. The company that charges off a bad debt may sell that debt to a debt collection firm.
Balance sheet- A report of a business’s financial condition. It includes assets, liabilities and net worth.
Balloon loan- Unlike an amortized loan, which pays off the principal completely at the end of the loan, a balloon loan leaves a large amount of principal unpaid. Usually, consumers refinance the balloon amount.
Balloon payment- The large payment left at the end of a balloon loan.
Bankruptcy- A legal proceeding that protects a debtor from legal action by some creditors.
Bankruptcy code- The informal name for federal bankruptcy laws.
Bankruptcy trustee- A private individual or corporation appointed in all Chapter 7, Chapter 12, and Chapter 13 cases to represent the interests of the bankruptcy estate and the debtor’s creditors.
Bounce protection- A high-cost form of overdraft protection that may be included as part of a customer’s checking account. It temporarily covers bounced checks, but charges a high fee to do so.
Breach of contract- Failure to abide by terms of a legal agreement.
Breach of covenant- Breaking a promise made in a contract.
C
Closed-end Credit- Generally, any loan or credit sale agreement in which the amounts advanced, plus any finance charges, are expected to be repaid in full over a definite time. Most real estate and automobile loans are closed- end agreements.
Collateral- Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. (Also called security.)
Community Reinvestment Act (CRA)- Encourages banks to help meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate incomes, while maintaining safe and sound operations.
Cosigner- Another person who signs for a loan and assumes equal liability for it.
Credit- The promise to pay in the future in order to buy or borrow in the present. The right to defer payment of debt.
Creditworthiness- A creditor’s measure of a consumer’s past and future ability and willingness to repay debts.
Credit Card- Any card, plate, or coupon book that may be used repeatedly to borrow money or buy goods and services on credit.
Credit History- A record of how a person has borrowed and repaid debts.
Credit Scoring System- A statistical system used to determine whether or not to grant credit by assigning numerical scores to various characteristics related to creditworthiness.
Credit reporting agency- A company that collects and sells information about how people handle credit. It issues credit reports that list how individuals manage their debts and make payments, how much untapped credit they have available and whether they have applied for any loans.
Credit repository- An antiquated term for a credit bureau.
Credit score- A number, roughly between 300 and 800, that reflects the credit history detailed by a person’s credit report. Lenders calculate this number with the assistance of computer systems as part of the process of assigning rates and terms to the loans they make.
Creditor- One who is owed money.
Creditor meeting- Also known as a 341 meeting, it is the meeting that takes place three to six weeks after the bankruptcy petition is filed, at which time the debtor may be questioned by the court-appointed trustee and the debtors’ creditors.
D
Default Failure- to meet the terms of a credit agreement.
Discount- An amount deducted from the regular price for those who purchase with cash instead of credit.
Debt- Money one person or firm owes to another person or firm.
Debt consolidation- The replacement of multiple loans with a single loan, often with a lower monthly payment and a longer repayment period. It’s also called a consolidation loan.
Debtor- Technically, a person who has filed a petition for relief under the bankruptcy laws. More generally, anyone who owes.
Deed of trust- A legal agreement that allows the lender to ask a title or escrow company to begin foreclosure proceedings on a property if the borrower stops paying the loan.
Delinquent mortgage- A home loan in which the borrower has failed to make payments on time, as specified in the loan agreement.
Destination charge- The fee charged for transporting the vehicle to the dealer from the manufacturer or port of entry. This charge is to be passed on to the buyer without any markup.
Direct deposit- An automatic deposit of wages or benefits to a customer’s bank account.
Direct financing- A buyer who lines up financing through an outside financial institution rather than through the dealer is said to have direct financing.
Distressed property- Property that is in poor condition, or whose owner is in poor financial condition.
Dividend- Distribution of earnings to shareholders. In credit unions, it’s the money paid to members for deposits, similar to the interest banks pay to their customers for deposits.
Down payment- An initial, partial payment on a purchase.
E
Early Termination Charge- Charges that the lessee must pay if the car is turned in early before the term of the lease is over.
Early withdrawal penalty- A depositor forfeits interest or is assessed a service charge for withdrawing funds from or closing out a time deposit before its maturity date.
Earned Income Credit- A credit that low-income workers can receive. If you are eligible, you must file a tax return to get the credit, even if you didn’t have any income tax withheld from your pay.
Earnest money deposit- Money given by a buyer when making a formal offer to demonstrate that the buyer is serious. Also called a deposit.
EFT- Electronic funds transfer. The transfer of money between accounts by consumer electronic systems such as automated teller machines (ATMs), and electronic payment of bills.
Electronic funds transfer- The transfer of money between accounts by consumer electronic systems such as automated teller machines (ATMs), and electronic payment of bills.
Encumbrance- A lien, charge or liability against a property.
F
Finance Charge- The total dollar amount paid to get credit.
Fixed Rate- A traditional approach to determining the finance charge payable on an extension of credit. A predetermined and certain rate of interest is applied to the principal.
Fair Credit Billing Act- Passed by Congress in 1975 to help customers resolve billing disputes with card issuers. The act requires issuers to credit payments to a customer’s account the day they are received.
Fair Credit Reporting Act- A federal law that governs what credit bureaus can report and for how long. It outlines procedures for correcting errors in credit reports. It requires credit bureaus to furnish copies of consumers’ credit reports at their request.
Fair Debt Collection Practices Act- A federal law that prohibits certain methods of debt collection, such as harassment.
FDIC- Federal Deposit Insurance Corp. An agency of the U.S. government that manages the bank insurance funds, which insure deposits at banks and other qualifying financial institutions.
Fed- Slang for the Federal Reserve, the central bank of the United States.
Federal Open Market Committee- The committee of the Federal Reserve that meets eight times annually to set the target rate for federal funds. When you read the headline Fed changes interest rates, you’re reading about action taken by this committee.
Federal Reserve Board of Governors- The seven-member governing board of the Federal Reserve System. Members are appointed by the president and confirmed by the Senate for their 14-year terms.
Federal Unemployment Tax Act- FUTA. The tax that employers pay to fund unemployment compensation programs.
FHA loan- A residential mortgage from an approved lender and insured by the Federal Housing Administration. The down payment on an FHA loan usually is less than that for a conventional mortgage. The FHA does not lend money, but nominates approved lenders.
Filing extension- An additional amount of time to file your return. A filing extension, however, does not give you more time to pay your taxes.
Finance charge- The charge for using a credit card, comprised of interest costs and other fees.
First lien- Primary claim by the lender for satisfaction of outstanding debt. A first mortgage creates a first lien.
Fixed installment- Periodic (usually monthly) payment on a loan whose sum does not vary.
Fixed-rate option- An option available on some home equity lines of credit which allows borrowers to fix the payments and interest on a portion of their balance.
G
Graduated Payment- Repayment terms calling for gradual increases in the payments on a closed-end obligation. A graduated payment loan usually involves negative amortization.
Garnishment- An amount withheld from your pay and turned over to another party to pay a debt.
Grace period- The interest-free time a lender allows between the transaction date and the billing date. The standard grace period is usually between 20 and 30 days.
H
Hard inquiry- A credit reporting term, it refers to an item on a person’s credit report indicating someone has pulled the report. It shows loan-shopping, and a little is all right, but too much loan-shopping can hurt your credit score.
HELOC- An acronym for home equity line of credit. Unlike home equity loans, which have fixed rates, HELOCs have variable rates.
High-LTV equity loan- A home equity loan that creates a total loan-to-value ratio of up to 125 percent or more.
Home equity- How much of a home’s value the owner owns. Can be borrowed against.
Home equity loan- A fixed interest loan backed by the amount of equity a homeowner has in the property.
I
Index- A table showing the yields or interest rates on certain classes of debt. The prime rate is the most common such index, but there are many others. Indexes are commonly used to set the interest rates on adjustable-rate mortgages, home equity lines of credit and variable credit cards.
Indexed rate- On variable loans, it’s the index plus some set margin. If your home equity rate, for example is prime plus 1 and the prime rate is 7.5 percent, your indexed rate is 8.5 percent.
Insufficient funds- Also known as NSF, it occurs when you there’s not enough money in your account to cover the checks that have been written.
Interest rate- The rate charged for the use of money, most often expressed as an annualized figure. In consumer loans, it’s the rate charged to consumers who want to borrow. In deposits, it’s the rate offered by an institution that wants to use consumers’ money.
Interest-only loan- An advance of money in which the installments pay only the interest for the initial period of the loan. No principal is paid off during the interest-only period of the loan.
J
Joint credit- Issued to a couple based on both of their assets, incomes and credit reports. It generally results in a higher credit limit, but makes both parties responsible for repaying the debt.
Joint petition- OA bankruptcy petition filed by both husband and wife.
K
no terms
L
Liability on an Account- Legal responsibility to repay debt.
Late charge- What you have to pay if you borrow money and don’t repay it in a timely way.
Liabilities- Debts and legal obligations.
Lien- A legal claim against property for payment of a debt. Liens must be paid or settled before property can be sold because they cloud the legal title.
Line of credit- An agreement that gives a borrower the right to take an uncertain amount of money, up to a maximum amount.
Liquidation- The sale debtor property to repay creditors. Used in bankruptcy to discharge debts.
Loan-to-value ratio (LTV)- The loan divided by property value. If the house is valued at $200,000 and the loan is $180,000, the LTV is 80 percent. Borrowing above 80 percent LTV is considered risky by lenders, and they charge some sort of premium for it. In mortgages, borrowing more than 80 percent of the home’s value usually triggers the need for private mortgage insurance. In home equity borrowing, you must pay a higher rate.
Low-documentation loan- Low-documentation loans are designed for the entrepreneur or self-employed, who do not or cannot verify steady income. Low-doc loans cost more than those in which income can be verified.
Lowball offer- A bid or offer far below market value.
M
Margin- The amount that lenders charge above an index, usually expressed as percentage points.
Merged credit report- summarized version of a person’s credit history combining information from all the credit reporting agencies.
Minimum average balance to avoid fees- Used in checking accounts. They require you to tie up a certain amount of money in your account to avoid fees.
Minimum payment- The minimum amount a cardholder can pay to keep the account from going into default. On credit cards, it is often an amount sufficient to repay the interest cost, fees, plus 1 percent of the principal balance.
Money factor- In auto leasing, money factor is the interest charge. For no particular reason except to confuse consumers, it’s expressed in auto leases as a tiny fraction rather than the familiar percentage. To convert it to a true interest rate, multiply it by 24.
N
Negative Amortization- Repayment schedule calling for periodic payments that are insufficient to fully amortize the loan. Earned but unpaid interest is added to the principal, increasing the debt. Eventually, payments must be rescheduled to fully pay off the debt.
National Foundation for Consumer Credit- A nonprofit organization that educates consumers about using credit wisely. The NFCC is the parent group for Consumer Credit Counseling Service.
Negative amortization- With a normal amortized loan, you gradually pay down your principal (the amount you borrowed). A few loans let you pay a smaller amount, which does not cover the entire principal and interest. In those cases, the shortfall is added to the remaining balance, creating negative amortization. It’s to be avoided, because you owe more than you did the month before.
Negative-equity financing- What happens when you buy a car, but you still owe on one, and owe more than it’s worth. The lender will gladly roll the shortfall into a new loan.
Nondischargeable debt- In bankruptcy, it’s debt that cannot be eliminated (discharged). The types of debt that cannot be discharged are set by bankruptcy law.
Notice of default- Any official notification that a borrower has failed to pay. In mortgages, it can describe a formal step in the foreclosure process in which the lender notifies the courts of a borrower’s failure to pay.
NSF- Also referred to as a returned or bounced check charge or non-sufficient funds fee.
O
Open-end Credit- A line of credit that may be used repeatedly up to a certain limit, also called a charge account or revolving credit.
Open-end Lease- A lease that may involve a balloon payment based on the value of the property when it is returned. (Also called finance lease.)
Overdraft Checking Account- A checking account associated with a line of credit that allows a person to write checks for more than the actual balance in the account, with a finance charge on the overdraft.
Over-the-limit fee- What credit card users get charged for spending more than their credit limits. Card issuers have made it a policy to let people exceed their maximums and charge them a fee for it, rather than have the credit card declined.
Overdraft protection- A service offered by banks to let you cover checks for more than you have in the account, by tapping another account or a line of credit.
P
Points- Finance charges paid by the borrower at the beginning of a loan in addition to monthly interest; each point equals one percent of the loan amount.
Payment cap- In adjustable loans, a cap is the limit on the how much a rate can go up in one period, usually a year.
Preparation charges- Often negotiable, and usually pure profit for a car dealer, it is an additional charge that dealers try to impose on buyers. Manufacturers already pay dealers to prepare cars for sale.
Prime rate- Formerly, it was the interest rate a bank charged its best or prime customers. Now, it’s simply an index used by banks to set consumer interest rates. (Prime customers get loans at below prime rate.)
Principal- The amount of money borrowed.
Private label cards- Credit cards issued by a retailer, and accepted only by that retailer.
Q
Quitclaim deed- A document transferring ownership and filed with the government. As its name suggests, one person who may have claim on a property promises to quit, or surrender, that claim. Often used by family members to settle inheritance issues or to clear up a gap in clouded titles.
R
Renegotiable Rate- A type of variable rate involving a renewable short- term “balloon” note. The interest rate on the loan is generally fixed during the term of the note, but when the balloon comes due, the lender may refinance it at a higher rate. In order for the loan to be fully amortized, periodic refinancing may be necessary.
Rate- How much a borrower pays for the use of money.
Reaffirmation agreement- An agreement by someone in bankruptcy to continue paying a debt after the bankruptcy. Usually used to keep a car from being repossessed and sold.
Redemption- Debtors sometimes may keep exempt secured property even though they owe money on it by paying the creditor the market value of the property rather than the amount of the debt.
Redlining- An illegal practice sometimes used by unscrupulous lenders and insurance companies to deny loans or policies to people because of their race.
Refinancing- The repayment of one loan with another. Refinancing can be for the remaining principal, or a greater amount (cash-out refinancing).
Regulation Z- The rule enforced by federal banking regulators that implements the Truth-in-Lending Act. It requires standardized disclosures of credit costs.
Remaining balance- Unpaid principal on a loan.
Remaining term- The time remaining before a debt is paid off if payments are made as scheduled.
Reorganization plan- In Chapter 11 or 13 bankruptcies, it’s a court-approved plan describing how the borrower will repay debts, usually over three to five years.
Repossession- The taking back of property after a borrower has stopped making payments.
Rescission- Certain auto loans, home equity loans and refinancings can be cancelled by the borrower within three days.
Restructured loan- When borrowers face foreclosure, the lender is sometimes willing to restructure the loan to prevent it. Restructured loans often extend the loan period.
Revolving credit- A line of credit that does not have a specified repayment schedule.
Roll in- When you include closing costs and origination fees, you roll in those fees to the loan balance. It results in lower out-of-pocket closing costs and higher monthly payments.
S
Security Interest- The creditor’s right to take property or a portion of property offered as security.
Seller’s Points- A lump sum paid by the seller to the buyer’s creditor to reduce the cost of the loan to the buyer. This payment is either required by the creditor or volunteered by the seller, usually in a loan to buy real estate. Generally, one point equals one percent of the loan amount.
Service Charge- A component of some finance charges, such as the fee for triggering an overdraft checking account into use.
Statement- The monthly bill from a credit card issuer that describes and summarizes the activity on an account. A statement includes the outstanding balance, purchases, payments, credits, finance charges and other transactions for the month.
Statement Date- The date on which a statement is generated, and the month’s finance charges (interest) are added to the balance.
Surcharge- An extra charge imposed on those who purchase with a credit card instead of cash. (Currently, surcharges for credit card purchases are prohibited.)
Secured card- Used by people new to credit, or people trying to rebuild their poor credit ratings. You secure the card by paying an amount upfront to the card issuer, who will then issue a credit card with that sum as your credit limit.
Secured loan- Borrowed money that is backed by collateral.
Security- Property used as collateral.
Servicer- The group that collects monthly mortgage principal and interest payments from homeowners and manages escrow accounts. It may or may not be the same firm that made the original loan.
Simple interest- Interest computed only on the principal balance, without compounding.
Starter home- A relatively small and inexpensive dwelling bought as a first home.
Subprime borrower- A borrower with a less-than-perfect credit report due to late payments or a default on debt payments. You can be a little bit subprime or a lot, depending on your record of payments. Prime borrowers are often called A borrowers, with subprime going from A- all the way down to D.
Subprime mortgage- A mortgage granted to a borrower with less than perfect credit. The rates and fees are higher than for a prime mortgage.
T
Tax sale- A sale of property to recover unpaid taxes.
Teaser rate- An introductory rate offered to entice customers to borrow.
Total expense ratio- The percentage of monthly debt payments compared to total before-tax income.
Two-cycle billing- A method of calculating credit card payments that is less favorable to consumers. In effect, it wipes out the grace period for customers who carry a balance.
U
Unsecured claim- A claim or debt for which a creditor holds no special assurance of payment, unlike a mortgage or lien; a debt for which credit was extended based solely upon the creditor’s assessment of the debtor’s future ability to pay.
Unsecured debt- Debt not guaranteed by collateral. Most credit cards are unsecured debt, which is a main reason why their interest rate is higher than other forms of lending, such as mortgages, which employ property as collateral.
Usury- Unlawfully high interest. Because credit card companies are based in states where friendly legislators repealed their usury laws, and federal rules allow the home state of the lender to rule, usury laws are usually meaningless today.
V
Variable Rate- A variable rate agreement, as distinguished from a fixed rate agreement, calls for an interest rate that may fluctuate over the life of the loan. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in either the payments or the length of the loan term. Limits are often placed on the degree to which the interest rate or the payments can vary.
Variable interest rate- A loan rate that can change, usually in line with a specified index.
Voluntary lien- A legal claim against property placed upon the property with the consent of the owner.
W
Workout- A type of mortgage in which the interest rate, term and/or monthly payment have been changed to prevent foreclosure.
X
no terms
Y
no terms
Z
Zero balance- What you have after you’ve paid off a loan.