If you’re just starting your personal finance journey, the lingo alone can be enough to stop you in your tracks. Fixed interest rates? Debt-to-credit ratio? Variable expenses?
Money talk can get complicated. That’s why we’ve pulled together this glossary of common terms. Brush up on your vocab – and get back to building a bright financial future.
An electronic fund transfer between banks and credit unions. Businesses, governments, and individuals can use ACH for all types of transactions, including direct deposits (ex: paychecks) and direct withdrawals (ex: bills on auto-pay).
A home loan where the interest rate changes periodically based on market conditions. ARMs offer an initial period with low interest rates (usually 5-10 years) but may incur rate increases in the future. In contrast, fixed-rate mortgages (FRMs) have higher interest rates that stay the same.
A charge required to use some - but not all - credit cards. Annual fees are most common with rewards cards and those designed for new or subprime borrowers. Annual fees are applied to your credit card statement once per year and can range from $10 - $100.
The rate of interest charged for a debt, expressed as a yearly rate. For credit cards, APR determines how much you’ll pay in interest if you carry a balance month to month. Most credit cards have multiple APRs for purchases, cash advances, and balance transfers.
A legal process that releases a person from a portion or all of their debt. While bankruptcy can provide a fresh financial start, it should only be considered as a last resort. A bankruptcy can show up on your credit report for 7-10 years and severely damage your credit score.
A person or entity who requests a loan or credit card. If approved, the borrower is responsible for meeting the repayment terms of the loan or credit account.
A short-term cash loan offered by a credit card company. Cash advances allow you to withdraw funds from a bank or ATM by borrowing against your card’s line of credit. You may also request a loan advance on your paycheck. Cash advances incur special interest rates, which are usually higher than standard purchases.
A complex type of bankruptcy frequently referred to as “Reorganization Bankruptcy.” Chapter 11 bankruptcy enables businesses to restructure their debts and financial obligations while staying in business.
A type of bankruptcy frequently referred to as a “Wage Earners Plan.” With a Chapter 13 bankruptcy, consumers must develop a plan to pay all or a portion of their debt over three to five years. A Chapter 13 bankruptcy will remain on your credit report for 7-10 years.
An unpaid debt that has been written off as uncollectable by a lender or creditor. Also known as “bad debt,” charged-off debt can be sold to third-party collections agencies. Chargeoff records can show up on your credit report for up to seven years from the date of first missed payment.
An item of value used by a borrower to secure a loan. Assets like homes and automobiles are the most common type of collateral, and can be seized by the lender if the loan goes unpaid. Certain credit cards also require up-front security deposits. (See Secured Credit Card)
When a lender sells a delinquent debt to a third party at a discount to minimize loss. Many types of debt can be sold to collections agencies, including unpaid credit card balances, medical bills, utility bills, and even student loans.
Once a collections agency has assumed the debt, it will attempt to contact the borrower to recover the unpaid balance. Collections records can stay on your credit report for up to seven years from the date of your most recent 180-day-late payment.
A person other than a primary borrower who assumes equal responsibility for a loan. Consumers with weak credit may use a cosigner to obtain a loan for which they otherwise would not qualify. A cosigner is contractually obligated to repay the debt if the primary borrower does not make payments, and the shared account will appear on the cosigner’s credit report.
Also known as “credit reporting agencies” – companies that collect and manage data about consumer financial activity. Credit bureaus use information provided by lenders and creditors to generate consumer credit reports. Lenders, creditors, and other entities can access these reports to evaluate potential borrowers. There are three major credit bureaus in the United States: Equifax, Experian, and Transunion.
A service designed to help consumers repair or improve their credit. Credit counselors help clients build debt repayment plans, apply for credit-building products, and improve negative credit history, among many other services.
Credit counseling is usually offered by non-profit organizations at a low cost, or even free. However, some predatory agencies charge high fees for low-quality services. Always review a company’s reputation and agreement terms before signing up.
The information a credit bureau has about you in its consumer database. The three national credit bureaus use data from your credit file to generate your credit report – which lenders use to evaluate your creditworthiness. Not everything in your credit file will wind up on your credit report.
Another term for the information that appears on your credit report. Your credit history is a record of your past and current borrowing activity, comprised of data provided to the credit bureaus by lenders and other sources. This information is used to generate consumer credit scores.
The maximum amount you are allowed to charge on a credit card or line of credit. Borrowers with lower credit scores generally receive lower credit limits. If you use a credit account responsibly, your creditor may increase your credit limit. It’s best to use less than 30% of an account’s credit limit to keep from dragging down your credit score.
A record of a consumer’s financial history used by lenders to evaluate borrower risk. Your credit report includes: your name; past and present addresses; credit and loan history and account activity; credit inquiries; and collection records.
A three-digit ranking that reflects an individual’s “creditworthiness.” Credit scores generally range from 300-850. A higher credit score indicates responsible credit use, while low scores signal the opposite.
Credit scores are generated using information from your credit report, including your repayment history, current debts and credit limits, average account age, and credit mix. There are many different credit scoring models, but FICO®and VantageScore® are most widely used.
Borrowed money that has yet to be repaid. Debt is incurred when someone (a borrower) owes another person or entity (a lender or creditor) a sum of money arising from a past transaction or financial agreement.
Combining some or all of your debts into a single loan or repayment plan. Consumers can consolidate their debt on their own, through a financial institution, or with the help of a credit counselor.
Debt consolidation does not erase your debt, but it can make it more manageable. If you’re able to secure a better interest rate on your new account, it can even save you money. (This is often the motivating factor behind loan consolidation.)
A negotiation between a borrower and a lender to “settle” a debt for less than the full amount. The borrower agrees to make a large, one-time payment in return for forgiveness of the remaining debt. While debt settlement can significantly reduce your debt, using a debt settlement company can be risky.
When you enter into an agreement with a debt settlement company, you will be asked to stop making payments on your debt. This can result in damaged credit from numerous late payments and charged-off accounts. Thoroughly investigate the reputation, cost, and contract terms before working with any debt settlement company.
Also known as your “credit utilization rate” – the amount you owe in unpaid debts compared to your credit limit across all credit accounts. In other words, how much credit is being used compared to what’s available.
Debt-to-credit ratio is used to measure financial health. The higher your debt-to-credit ratio, the less likely you are to be living within your means – which translates to greater lender risk.
The percentage of your monthly income (pre-tax) that goes towards payments on outstanding debts. A lower debt-to-income ratio indicates greater financial stability, and vice versa.
Lenders look at two debt-to-income ratios: front-end and back-end. A front-end ratio only considers monthly mortgage payments. Back-end ratios consider all existing debt, including mortgage payments, car loans, and credit card balances.
A status indicating a debt is significantly overdue. Accounts usually go into default after remaining delinquent (late) for several billing cycles. Default accounts can have a devastating impact on your credit report, even after you get caught up.
A late or missed payment on a loan or credit account. Outstanding debt is usually listed as 30, 60, 90, or 120 days delinquent, because most lenders have monthly billing cycles. Delinquencies can remain on your credit report for up to seven years, though they carry less weight over time.
The process of challenging an item on your credit report. When you file a dispute, the credit bureau must investigate and correct the item (if applicable) within 30 days. You will receive a letter notifying you of the bureau’s decision. If a correction is made you’ll receive a copy of your updated credit report; otherwise, the letter will explain why your claim was rejected.
The value of a home, minus the owner’s principal (unpaid mortgage) and liens against the property. Homeowners build equity by paying down their mortgage and when a property increases in value.
A 2003 law regulating the consumer credit industry. Under the FACT Act, all US residents are entitled to a free annual copy of their consumer credit report from each of the national credit bureaus. The FACT Act also establishes consumer privacy regulations, identity theft safeguards, and dispute guidelines. It also governs when specific items will expire from your credit report, and who can access your credit data.
The most widely-used brand of credit score, developed by the Fair Issac Corporation. Your FICO® Score is a strong indicator of what a lender will see when they check your credit. There are many different credit scoring formulas, however, and each can vary slightly depending on its evaluation methodology.
A legal process in which a creditor is authorized to take a portion of your salary or assets (including money in your bank account) to collect an unpaid debt.
Also known as “gross earnings” or “taxable income” – your total income before taxes or other deductions. This includes income from all sources, not just employment.
A record of a credit check on your credit report. An inquiry is added every time you, a creditor, or a potential creditor requests a copy of your credit report. (See Soft Inquiry and Hard Inquiry)
A loan you repay over a specific timeline - usually months or years - with regular payments of the same amount. These loans are frequently used for large purchases like cars or automobiles. Installment loans are often “secured” by an asset or piece of valuable property. (See Collateral)
The balance on an installment loan account. Installment debts are repaid with a fixed number of equal payments over a pre-determined timeline. (Ex: $500/month for 24 months.)
The cost of borrowing money from a lender or creditor. Interest is calculated as a percentage of the loan amount or credit account balance, and is applied to the borrower’s monthly bill.
The amount a lender charges to borrow money, expressed as a percentage of the amount loaned. Interest is typically indicated as Annual Percentage Rate (APR). In general, borrowers receive lower interest rates the higher their credit scores.
A court decision regarding an unpaid debt or financial penalty. When you owe a creditor money and don’t pay it, the creditor can take you to court to seek repayment. Judgments no longer appear on your credit report and do not affect your credit score. They are, however, public record – and potential lenders can access this information.
An individual or financial institution who provides a loan to a business or individual (borrower).
A legal claim to an asset or piece of property - like a house or automobile - to ensure the owner pays their debt. If a contract is not paid, the lien holder has the right to seize and sell the property. The owner cannot sell property under lien without paying off the debt or receiving permission from the lien holder.
The minimum amount owed on credit card debt each month. You must pay at least your monthly minimum to keep an account in good standing – but you’ll save on interest by paying more.
When the loan payment for any period is less than the interest charged over that period. When this happens the outstanding balance of the loan increases, despite your payment.
Your income after taxes and other withholdings (such as health insurance, 401(k) payments, and life insurance) have been deducted. Net income is also known as “take-home pay.”
The amount of money borrowed with a loan, or an account’s unpaid balance excluding interest charges.
Information available for public access. Public records include bankruptcies, tax liens, foreclosure, unpaid child support, and court judgments. Some public records do not show up on your credit report or harm your credit score, but lenders can still access this information.
A set time frame in which a borrower is required to make payments on a loan. During a repayment period, a borrower is not allowed to take out any additional money and must pay down the loan. Repayment periods most commonly apply to home equity lines of credit.
When a creditor claims property (such as a car, boat, or building) that was used as collateral for a loan that is significantly overdue.
An account for which the balance and payment fluctuate from month to month. Most credit cards are revolving accounts: your balance and monthly bill increase and decrease as you use and pay down your line of credit.
A financial agreement that allows a consumer to borrow against a pre-approved line of credit up to a certain amount (see Credit Limit). Revolving debt does not have a fixed monthly payment; the amount you owe is determined by your account balance and the interest it has accrued.
A credit account that requires the consumer to provide a cash deposit (or other collateral) to borrow against the account. Deposits on secured cards are usually equal to the account’s credit limit. This reduces risk for lenders working with folks with poor or non-existent credit.
A type of loan that requires an asset or piece of property (like a house or automobile) to be provided as collateral. If the debt goes unpaid, the lender is authorized to seize the collateral.
A status that indicates a lender “settled” a debt for less than the total amount. A settlement is considered negative credit history, even if the account was otherwise in good standing. As a rule of thumb, only settle a debt that is already harming your credit score – i.e., it is significantly overdue or has gone into collections.
A unique nine-digit number assigned to US citizens and other residents. Your SSN is used as a universal identifier by the US government – but is also used by creditors, banks, hospitals, employers, and many other businesses to verify your financial accounts. People who do not have an SSN (such as non-US citizens) use an Individual Taxpayer Identification Number (ITIN).
A credit inquiry that does not affect your credit score. A soft inquiry is recorded when someone accesses your credit report for a reason other than a credit application. This includes personal requests and requests by potential landlords or employers. Soft inquiries are recorded by the national credit bureaus but usually do not appear on your credit report.
A legal claim against the property or assets of an individual that fails to pay government taxes. The lien may be removed if the taxpayer settles up or agrees to a repayment plan; otherwise, the government may seize the assets.
One of the three national credit bureaus in the United States. TransUnion collects and provides consumer credit reports to lenders, financial institutions, and other entities. TransUnion operates the TrueCredit and FreeCreditProfile brands.
A loan that does not require the borrower to provide collateral. Most, but not all, credit card accounts are unsecured debt. (See Secured Credit Cards)
A loan without an asset given as security. Unsecured loans are not backed by collateral, which makes them riskier for lenders – thus, they typically come with higher interest rates.
Your current credit account balance as a percentage of your total credit limit (also known as debt-to-credit ratio) This ratio shows lenders how much of your available credit you are using, either on one account or across all lines of credit.
Expenses that fluctuate from month to month, like credit card bills, groceries, utility bills, and gasoline.
An interest rate on a loan that fluctuates over time in response to movements on another economic index – sometimes called an “adjustable” or “floating” rate.
Financial lingo can be complicated, but most folks still pay their bills responsibly. Unfortunately, this usually doesn’t help build credit. Until now.
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The StellarFi blog is intended to serve as an informational resource. While StellarFi can help you build your credit, we do not provide financial, legal, or accounting advice. Please consult a trusted advisor for financial, legal, or accounting guidance as needed.