Financial Glossary: Common Debt Terminology & Definitions
APR (Annual Percentage Rate):
When evaluating credit card offers it’s important to understand the difference between the interest rate and the APR. The interest rate is the percentage of the loan amount that the bank is charging you to borrow money. The APR includes other costs of the loan (the upfront fees, annual fees, etc.) and calculates them as a yearly percentage of the loan amount. Because of this, APR is a more accurate representation of the true cost of a loan. The lower the APR the less you will be charged for using the credit card. Compare APRs carefully and choose a card with a low rate. Be aware that credit card companies do not need a reason to raise interest rates and will check your credit periodically to determine your continued creditworthiness.
Typically, you will want to avoid cards with annual fees. The annual fee is simply charged for the privilege of having a credit card. There are many credit cards available that do not charge annual fees, yet offer good APRs and other benefits.
The balance refers to the amount of money in a financial account, such as a bank account or credit card, at a specific point in time. It represents the difference between credits (deposits or payments into the account) and debits (withdrawals or expenses from the account).
Balance Computing Technique:
This is the method by which the creditor calculates the finance charge. The most commonly used method is the average daily balance. To calculate this, each daily balance is added up and divided by the number of days in the billing cycle. Some creditors will compute your average daily balance over two billing cycles.
A balance transfer is a financial transaction where the outstanding balance from one credit card is moved or transferred to another credit card. This is typically done to obtain a lower interest rate or better terms.
Bankruptcy is a legal process that allows individuals or businesses in financial distress to seek relief from overwhelming debt by declaring bankruptcy. It involves declaring an inability to repay debts and may result in the liquidation of assets or the development of a repayment plan.
Better Business Bureau
The Better Business Bureau is a non-profit organization that collects and provides information about businesses and their ethical practices. It offers accreditation to businesses that meet its standards and serves as a resource for consumers to check a company's reputation.
Chapter 7 bankruptcy:
In a Chapter 7 bankruptcy, you are relieved of all of your debts, but in exchange, you may have to give up any non-exempt property. Exempt property is property that may not be taken by creditors and does not have to be forfeited in bankruptcy. According to the bankruptcy code, exemptions typically include clothing, personal belongings, regular household furniture, one auto, and at least some of the equity in your primary residence.
Chapter 13 bankruptcy:
A Chapter 13 bankruptcy allows you to keep your property, but in exchange, you pledge your disposable income towards the repayment of your debt. In a Chapter 13 bankruptcy, you must have an income and you must adhere to a court-ordered repayment plan. The amount of your payments is based on your income and the amount you owe the creditors. The creditors do not decide how much you must pay each month, the bankruptcy court does. Once you have completed the repayment plan, any remaining debt may be dismissed by the court.
Collections refer to the process of pursuing and recovering unpaid debts. This can involve a creditor or debt collector attempting to collect a debt through various means, including phone calls, letters, or legal actions.
Consumer debt is the total amount of money that an individual owes to creditors, typically in the form of loans, credit card balances, and other financial obligations.
A co-signer is a person who agrees to be legally responsible for repaying a loan or debt alongside the primary borrower. The co-signer's credit and finances may be used to secure the loan.
Credit counseling is a service provided by non-profit organizations to help individuals manage their finances, improve their credit, and develop a plan to repay debts. It often includes budgeting and financial education, and many feature a debt management plan.
Credit bureaus are companies that collect and maintain financial data on consumers. They compile credit reports, which contain information on an individual's credit history and are used to calculate credit scores.
A credit limit is the maximum amount of credit that a lender or financial institution is willing to extend to a borrower. It fluctuates based on the consumer & represents the cap on how much can be borrowed or charged on a credit card or credit line.
A credit report is a detailed record of an individual's consumer credit history, including credit accounts, payment history, outstanding debts, and public records. Lenders use it to assess creditworthiness.
A credit score is a numerical representation of a person's creditworthiness, based on information in their credit report. It helps lenders assess the risk of extending credit to an individual. A credit score can range between 300 and 850, with a credit score of 700 or above considered to be good credit.
The extent to which a person or company is considered suitable to be lent money or allowed to have goods on credit, often based on their reliability in paying money back in the past.
Debt is money borrowed or owed to creditors. It must be repaid, usually with interest, over a specified period. Debt can take various forms, including loans, credit card balances, and mortgages.
Debt-to-income ratio (DTI):
The debt-to-income ratio (DTI) is a financial metric that compares a person's monthly debt payments to their gross monthly income. It helps lenders assess a borrower's ability to manage additional debt based on their current financial situation.
Debt consolidation means that multiple debts are rolled together into a loan, allowing you to slowly pay them off with one convenient monthly payment. Essentially, you're paying off all your smaller loans with a new one. This is a common method for individuals with high-interest debt.
Debt Management Plan:
Debt management plans are tools that help those struggling with credit cards, medical bills, and other balances. This custom-tailored plan provides a clear pathway toward debt freedom. It may also include other financial strategies to help set you up for future success. American Financial Solutions proudly offers debt management plans that consolidate loans and credit cards.
Debt settlement is a negotiation process in which a debtor and creditor agree to a reduced payoff amount to satisfy a debt, typically as an alternative to bankruptcy. It may negatively impact credit scores.
Default occurs when a borrower fails to fulfill the terms of a loan or credit agreement, such as missing payments or violating other contractual obligations.
Delinquency refers to payments that are overdue or late. It indicates that a borrower has not made required payments on time.
Equifax is one of the three major credit bureaus in the United States. It collects and maintains credit information on consumers and provides credit reports and credit scores.
Experian is another major credit bureau that compiles credit information and generates credit reports and credit scores for individuals.
Fair Credit Reporting Act (FCRA):
The FCRA is a federal law that regulates the collection, reporting, and use of credit information. It provides consumers with certain rights regarding their credit reports.
Fair Debt Collection Practices Act (FDCPA):
The FDCPA is a federal law that protects consumers by governing the behavior of debt collectors. It sets rules and limitations on how debt collectors can communicate with and collect debts from consumers.
A FICO score is a credit score developed by the Fair Isaac Corporation (FICO). It is widely used by lenders to assess credit risk and make lending decisions.
The grace period is the period in which no interest is charged if the entire balance is paid off before the due date, usually 21-25 days. This only applies if the amount is paid in full each month. If you run a balance on your card, the grace period does not apply.
A hard inquiry is a credit information request that occurs when a lender checks your credit report for a loan or credit application. It may have a slight impact on your credit score.
Home equity is the current market value of a homeowner's property minus the outstanding mortgage balance. It represents the owner's financial interest in the property.
Home Equity Line of Credit (HELOC):
HELOC is a flexible loan allowing homeowners to borrow against the equity in their homes. It functions like a credit card with a revolving credit line secured by the home.
Interest is the cost of borrowing money or the return on investment for lending money. It is usually expressed as a percentage of the principal amount and is added to the outstanding balance.
The interest rate is the percentage at which interest is charged on a loan or credit balance. It determines the cost of borrowing or the return on savings or investments.
Internal Revenue Services (IRS):
The IRS is the federal agency responsible for collecting taxes in the United States. It enforces tax laws and administers tax-related programs.
A joint account is a bank account shared by two or more individuals, allowing all parties equal access to the funds and responsibility for transactions.
A judgment is a legal decision resulting from a court case. In a financial context, it may refer to a court-ordered debt repayment.
Almost all credit card companies will charge a fee if you are late (even by one day) or miss a payment. Late fees are as high as $39 and can even cause you to be over the limit if you are near your credit limit. This will result in more fees. Avoid these charges by paying your bills electronically or mailing payments at least 10 days before your due date. A lender will usually raise your APR if you are late making your payments.
Line of credit:
A line of credit is a flexible financial arrangement that allows borrowers to access funds up to a predetermined credit limit. Interest is typically charged only on the amount borrowed.
Minimum payments are the smallest amount that a borrower must pay on a loan or credit card balance each month to remain in good standing. Paying only the minimum may result in higher interest costs and longer repayment periods.
Negative amortization occurs when loan payments are insufficient to cover the interest, leading to an increase in the loan balance. It is common in certain types of loans.
Net income, also known as net profit or earnings, is a financial metric that represents the total amount of profit a business or individual has earned after deducting all expenses, taxes, and other costs from their total revenue. It is a key indicator of financial performance and is calculated by subtracting all relevant expenses from the total revenue.
Notice of Reaffirmed Debts:
This notice is a formal statement declaring the intention to repay a debt that could have been discharged in bankruptcy. It reaffirms the debtor's commitment to repay.
Over the Limit Fees:
It is important to pay attention to your credit limit and avoid exceeding it. Most lenders will allow you to charge slightly more than the limit, but it will cost you. Over-the-limit fees may be as much as $39. In addition, lenders may increase your APR if you exceed your limit. It is better for your credit and your pocketbook if you keep your credit card balances within 1/3 of the available credit limit.
Principal is the initial amount of money borrowed or invested, excluding interest. It represents the original sum of the loan or investment.
Qualifying ratios are used by lenders to assess a borrower's financial capacity. They compare the borrower's income to their debts and help determine loan eligibility.
Refinancing is the process of replacing an existing loan with a new one that has different terms, often to obtain better interest rates or lower monthly payments.
Residual interest is the interest that accrues on a credit card balance between the statement date and the payment due date. It is the result of the time lag between billing and payment.
Secured debt is a type of debt that is backed by collateral, such as a car or home. If the borrower defaults, the lender can seize the collateral to satisfy the debt.
TransUnion is one of the major credit bureaus that collects and maintains credit information on consumers and provides credit reports and credit scores.
Unsecured debt is not backed by collateral, relying solely on the borrower's creditworthiness. Credit cards and personal loans are common examples.
An unsecured loan is a loan without collateral, granted based on the borrower's creditworthiness. Personal loans are a typical example.
The utilization ratio is the ratio of a borrower's outstanding credit card balances to their credit limit. It is a factor in determining credit scores, and lower ratios are generally favorable.