Credit Sesame’s A to Z of credit terminology.
While not exhaustive, this A to Z of credit terminology is a solid starting point for understanding key concepts in the world of credit. Whether navigating credit reports, considering loans, or aiming to boost your credit score, familiarizing yourself with the language of credit is a valuable tool on your journey toward financial literacy.
- Amortization: The gradual repayment of a loan through scheduled installments covering principal and accrued interest.
- Annual percentage rate (APR): The total cost of borrowing, expressed as a percentage, encompassing interest and fees.
- Authorized user: An individual granted permission to use another person’s credit account, often to build their own credit history.
- Authorized user credit card: An authorized user credit card is issued to an individual authorized by the primary cardholder to make purchases using the card. The primary cardholder remains responsible for any debts incurred on the card.
- Balance transfer: Shifting outstanding debt from one account to another, typically to secure lower interest rates or consolidate payments.
- Bad credit: A low credit score indicating higher risk, making it challenging to obtain favorable loan terms.
- Bankruptcy: A legal process relieving individuals or entities from overwhelming debt obligations, often involving restructuring or asset liquidation.
- Billing cycle: The timeframe between credit card statement issuance and the payment due date.
- Charge-off: A creditor’s declaration that a debt is unlikely to be collected, typically after prolonged non-payment.
- Collateral: Assets pledged to secure a loan, providing lenders recourse if the borrower defaults.
- Credit bureau: Agencies that collect and maintain credit information, generating reports utilized by lenders to assess creditworthiness. Equifax, Experian and TransUnion are the three major credit bureaus in the United States.
- Credit limit: The maximum amount a borrower can owe on a credit account.
- Credit mix: The variety of credit types in an individual’s profile. Examples include mortgages, credit cards, and installment loans.
- Credit monitoring: A service that tracks changes in credit reports and alerts consumers to potential fraud or inaccuracies.
- Credit report: A detailed record of an individual’s credit history, including payment history, debt levels, and inquiries, used by lenders to assess creditworthiness.
- Credit score: A numerical representation of creditworthiness, typically ranging from 300 to 850, influencing loan approvals and interest rates.
- Credit utilization: The ratio of credit card balances to credit limits, impacting credit scores. Ideally, it should remain below 30%.
- Debt consolidation: Combining multiple debts into a single loan or payment plan to simplify management and potentially reduce interest rates.
- Debt-to-income ratio: The percentage of monthly income dedicated to debt payments, influencing loan eligibility and financial health. Generally, below 36% is considered favorable.
- Default: Failure to meet financial obligations according to loan terms, often resulting in adverse consequences like late fees, foreclosure, or repossession.
- Delinquency: Failure to make timely payments on debts, typically exceeding 30 days past due.
- Dispute: Challenging inaccurate or outdated information on a credit report through a formal process to ensure accuracy.
- Employment history: An individual’s record of work experience sometimes considered in credit decisions, as it reflects income stability.
- Equal Credit Opportunity Act (ECOA): U.S. law prohibiting discrimination based on race, religion, gender, national origin, marital status, age, or disability in credit granting.
- Equifax: One of the three major credit reporting agencies in the U.S., providing credit reports and scores to lenders.
- Experian: Another major credit reporting agency in the U.S., offering similar services to Equifax.
- FICO score: A widely used credit scoring model developed by Fair Isaac Corporation, influencing loan approvals and interest rates.
- Fair Credit Reporting Act (FCRA): U.S. law governing the collection, use, and disclosure of consumer credit information, ensuring consumer rights and accuracy of reporting.
- Fixed interest rate: An interest rate that remains constant throughout the loan term, providing predictable borrowing costs.
- Foreclosure: The legal process in which a lender repossesses a property due to borrower default on mortgage payments.
- Garnishment: A legal order allowing creditors to collect debt directly from a debtor’s wages or bank accounts.
- Good Credit: A high credit score indicating lower risk, facilitating access to favorable loan terms and lower interest rates.
- Grace period: A typically short timeframe, often offered on credit cards, during which no late fees are charged for overdue payments.
- Home equity: The portion of a property’s value owned by the homeowner, calculated as the difference between the market value and outstanding mortgage balance.
- Inquiry: A formal request for a copy of an individual’s credit report, which can temporarily impact credit scores due to potential new credit applications.
- Interest rate: The cost of borrowing money, expressed as a percentage of the loan amount, paid to the lender over the loan term.
- Income verification: The process of confirming a borrower’s income through documented proof, such as pay stubs or tax returns, to assess their ability to repay a loan.
- Joint account: A credit or bank account shared by two or more individuals, with joint responsibility for managing the account and repaying any associated debts.
- Joint credit: Credit extended to two or more individuals, with shared obligation for repayment and potential impact on each individual’s credit score.
- Judgment: A legal decision requiring a debtor to repay a debt, often resulting from a lawsuit filed by the creditor.
- Key derogatory: Significant negative information on a credit report, such as bankruptcies, foreclosures, or charge-offs, which can severely impact credit scores and access to credit.
- Late payment: A payment made after the due date, incurring late fees and potentially damaging credit scores.
- Line of credit: A revolving credit arrangement allowing a borrower to access funds up to a specified limit and repay borrowed amounts with interest over time.
- Loan modification: An alteration of existing loan terms, such as interest rates, repayment schedules, or principal amount, often negotiated between the borrower and lender to improve affordability.
- Loan-to-value ratio (LTV): The percentage of a loan amount compared to the appraised value of the collateral, used by lenders to assess risk and determine eligibility for certain loans.
- Mortgage: A secured loan used to purchase real estate, with the property serving as collateral for the loan.
- Negative information: Adverse details recorded on a credit report, such as late payments, delinquencies, or charge-offs, impacting credit scores.
- Net income: An individual’s total income minus expenses, reflecting their available financial resources and debt repayment capacity.
- No credit history: Lack of any credit activity or insufficient information on an individual’s credit report, making it challenging to assess creditworthiness.
- Non-dischargeable debt: Debt obligations that cannot be eliminated through bankruptcy proceedings, such as student loans and some types of taxes.
- Outstanding balance: The total amount currently owed on a credit account, excluding any minimum payments already made.
- Overdraft: A situation where a bank account balance falls below zero, typically resulting in fees and potential limitations on account activity.
- Over-the-Limit fee: A charge levied by a credit card issuer when the cardholder’s balance exceeds their credit limit.
- Personal loan: An unsecured loan not backed by collateral, typically used for personal expenses such as debt consolidation or major purchases.
- Pre-Approval: An evaluation of loan eligibility involving verification of income, employment, and credit. Requires documentation submission and a hard credit inquiry, which may temporarily impact credit score. Offers a conditional loan commitment based on verified information, strengthening your position as a borrower.
- Pre-Qualification: An initial assessment of loan eligibility based on self-reported information. Requires no documentation or credit pull, offering a general idea of potential loan terms but not guaranteeing final approval.
- Principal: The original amount borrowed in a loan agreement, excluding accrued interest.
- Public record: Financial information, such as bankruptcies, judgments, or tax liens, accessible to the public through official records.
- Qualification: Meeting the criteria and requirements established by a lender for loan approval, typically based on factors like credit score, income, and debt-to-income ratio.
- Qualitative analysis: An assessment of creditworthiness beyond solely relying on numerical data, considering factors like employment stability, financial habits, and overall financial situation.
- Revolving account: A credit account with a flexible spending limit, allowing repeated borrowing and repayment of balances with ongoing interest charges.
- Revolving credit: A type of credit characterized by a flexible spending limit and revolving balance, typically associated with credit cards and lines of credit.
- Refinancing: Replacing an existing loan with a new one, often to secure better interest rates, lower monthly payments, or extend the loan term.
- Repossession: The legal process by which a lender reclaims ownership of collateral, such as a car or house, due to borrower default on loan payments.
- Secured credit card: A credit card requiring a security deposit, often used by individuals with limited or poor credit history to build credit.
- Secured debt: Debt backed by collateral, which the lender can seize if the borrower defaults on the loan.
- Soft inquiry: A credit inquiry initiated for non-credit-related purposes, such as employment background checks or pre-qualification offers, typically not impacting credit scores.
- Subprime: Borrowers with credit scores below a certain threshold, typically associated with higher interest rates and stricter lending criteria.
- Terms and conditions: The specific rules and agreements governing a credit or loan agreement, outlining rights and responsibilities of both the borrower and lender.
- Thin file: A limited credit history with insufficient data for accurate credit score calculation, making it challenging for lenders to assess creditworthiness.
- TransUnion: The third major credit reporting agency in the U.S., providing credit reports and scores to lenders.
- Truth in Lending Act (TILA): U.S. law requiring lenders to disclose accurate and comprehensive information about loan terms and costs to borrowers before loan closing.
- Unsecured credit card: A credit card issued without requiring a security deposit, based solely on the borrower’s creditworthiness.
- Unsecured debt: Debt not backed by collateral, posing higher risk for lenders and potentially
- Usury: Charging excessively high interest rates on a loan, exceeding legal limits established to protect borrowers from predatory lending practices.
- Variable interest rate: An interest rate that can fluctuate over the loan term, influenced by market conditions or specific loan terms.
- Verification: Confirmation of information provided by a borrower during the loan application process, such as income or employment, to ensure accuracy and assess creditworthiness.
- Virtual credit card: A temporary credit card number generated for online transactions, enhancing security by limiting exposure of the actual card details.
- Wage garnishment: A legal order authorizing creditors to collect unpaid debts directly from a debtor’s wages or bank account, typically following a court judgment.
- Write-off: A creditor’s accounting practice declaring a debt as unlikely to be collected, removing it from their active accounts but potentially impacting the debtor’s credit score.
- Working capital: A financial metric representing a company’s short-term operational liquidity, reflecting its ability to meet ongoing expenses through current assets.
- Zero-percent APR: Some promotional credit cards or loans offer introductory periods with 0% annual percentage rate (APR), meaning no interest accrues on purchases or borrowed amounts within the specified timeframe.
- Zombie debt: Though not an official term, “zombie debt” refers to old, often expired debts that resurface unexpectedly. Creditors may attempt to collect on these debts through various means, making it crucial for consumers to remain vigilant and verify the legitimacy of such claims.
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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.
