Credit Glossary
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.